PayPal Money Market Fund
In a recent comment, Tech mentioned that PayPal was paying over 5% on their money market fund. In a nutshell, my response was to stay away from the PayPal account for a couple of reasons.
Money Market Fund.
The PayPal Money Market Fund is often discussed together with online savings accounts such as HSBCdirect, ING Direct or EmigrantDirect. Unfortunately, that is not really an apples to apples comparison because PayPal is money market fund whereas the others are all savings accounts.
While that might not seem like a big deal, it is important to understand that a money market fund has the potential to lose money. In my experience, money market funds do not lose money very often but if you are considering this as a vehicle for your emergency savings this would certainly make me think twice.
Not FDIC-Insured.
Unlike banks, PayPal is not FDIC-insured. If you are not familiar with what it means to be FDIC-insured, you can visit FDIC.gov for more explanation but it basically means your funds are protected up to the first $100,000 per depositor per bank.
The fact that PayPal is not FDIC-insured is enough to rule them out for my personal use. While my emergency savings are not pushing the $100,000 limit, it is still a significant amount of money that I do not feel comfortable losing in the event something happens to PayPal. Having my funds in an FDIC-insured account offers me peace of mind with regard to my savings.
Account Freeze.
While I have not used PayPal enough to have experienced this, I have read numerous articles and stories about how PayPal can freeze an account without notice and it can be difficult to remove the freeze on your funds. I don’t know about you but the idea of not being able to access my funds in an emergency (or just whenever I want) does not sound like a good one.
For more information on the risks of having your funds frozen by PayPal, you can check out Why PayPal Freezes Accounts or PayPal Warning.
Not All Bad.
Don’t get me wrong, I do not think PayPal is all bad and have an account with them myself. However, I would certainly recommend against using their money market fund as a savings vehicle for your emergency fund. It might have a place as a sweep account for a small amount of money if you regularly buy or sell through PayPal but I would not go much further than that.
Given that the online savings accounts mentioned earlier all offer FDIC-insured accounts that are regulated (meaning they cannot freeze your funds without notice) and have competitive rates, I would recommend you select one or more from the stable including HSBCdirect, ING Direct or EmigrantDirect.
Yep, I’ve been advised to invest my cash into Paypal’s Market Fund, luckily I did some extensive research and never did enter, thanks for making me more comfortable with my decision! heh..
Allen.H
Glad to hear that you did not follow the advice blindly and performed your own due diligence. If I may ask, where did you place the money instead of PayPal?
I’m not familiar with PayPal’s money market and I also value the security of having funds FDIC insured. Of course, each person has to make choices based upon their own tolerance for risk. To earn higher returns on your cash accounts, I might suggest researching the following:
http://geinterestplus.com/interestplus/ – Currently a 5.43% Yield for balances over $50K. This is invested in unsecured senior debt of GE Capital (not FDIC insured – read prospectus).
https://bank.countrywide.com/scontent.aspx?cmtag=Content-SavingsLink – currently 5.40% Yield for balances over $50K. This is FDIC insured.
The only problem with those accounts are that those rates require a balance greater than $50k, which is tough to do for many people.
For smaller balances, you aren’t missing much by going with HSBC or Emigrant. I’ve posted about my switch to HSBC and right now I am taking advantage of their 6.0% APY promotion through the end of April.
It’s definitely a fair comment about the funds required to get the highest rates. I guess I could have posted the entire tiering for each (lazy):
GE Interest Plus
Amount Rate Yield
Less than $15k 4.80 4.91
$15k – $49,999 5.05 5.17
$50k and more 5.30 5.43
Countrywide
Amount APY
$1 – $9,999 = 4.00%
$10,000 – $49,999 = 5.25%
$50,000 – $2,499,999 = 5.40%
$2,500,000 + = 1.50%
After the promotional period, the HSBC rate goes back to 5.05%. This is not bad at all. I guess it really depends on how much you have to invest / risk tolerance, etc. If you don’t need the money anytime soon, there are some pretty good CDs out there paying better than either (ex: 5.75% for a 6 mo CD).
I’m looking for a short term ( 6 months ) cd. Can anybody assists me???
I’d recommend that you take a look at BankRate.com to get a feel for the current rates. As a shortcut for you, here is a link to the high yield rates for a 6-month CD courtesy of BankRate.
Depending on your scenario, you may have better luck simply using an online savings account like HSBCdirect or EmigrantDirect. The reason is that there is no minimum balance, which many of the CDs require for the best rates, and their rates are just as good if not better than the short-term CDs.
The one drawback is that you would be sacrificing the ability to lock-in your rate for 6 months. But this is only a negative if you anticipate rates decreasing in the next 6 months.
“In my experience, money market funds do not lose money very often but if you are considering this as a vehicle for your emergency savings this would certainly make me think twice.”
I think you should change this sentence.
Not just in your experience, but in world history, money market funds have NEVER lost money. So its not that they rarely or not very often lose money. They have historically never lost money. But banks have failed. So much for FDIC which is basically a worthless false sense of comfort.
Yup. A PayPal freeze doesn’t work well for a money market fund. If you are using PayPal as a money market fund, they probably consider your account “freezable.” PayPal’s money market is probably their biggest lure, not to mention their ATM and getting verified by adding a bank account. Am I writing riddles here or trying to make sense out of PayPal’s rules? There is nothing wrong with a person being skeptical of PayPal!