Money market fund yields stuck at 0.01% for several years after the financial crisis. Some fund companies had to pump money into the funds out of their own pocket just to keep the yield at 0.01%. Meanwhile some banks kept their high yield savings account at close to 1%, with FDIC insurance. It was a no brainer to use a high yield savings account instead of a money market fund for liquid savings. I said so back in 2014 in Stop Using Vanguard Money Market Fund.
Time has changed. After a few Fed rate hikes, money market funds staged a quiet come back, while banks did very little in keeping the pace. The yield on the Vanguard Prime Money Market Fund (VMMXX) is now 1.05%. Banks only slowly increased the yield on their high yield savings accounts slightly above 1% (at the time of writing, Ally 1.05%, CIT, Synchrony, Barclays 1.15%, GS Bank 1.20%, a few others at 1.25% or 1.30%). Perhaps they are banking on people not noticing the higher yields in money market funds. If they were to maintain the same margin over money market funds as they did before, the yields on the savings accounts should be around 2% now.
If you are in a higher tax bracket, including state income tax, muni money market funds are also a good option. The yield on the Vanguard California Municipal Money Market Fund is 0.68%. Although the headline number is lower, when you consider it’s tax free at federal and state levels, California investors in a higher tax bracket actually get to keep more than they do in a fully taxable fund.
Money market funds have a few advantages over high yield savings accounts. Its yield automatically adjusts with the market of short-term instruments. As the short-term interest rates go up, you automatically get the higher yields, minus the expense ratio charged by the fund. You are not relying on the good will of any bank as to when they will raise the rates on their savings account. You don’t have to move from one bank to another if the current bank you are using decides to hold off when other banks increase their rates.
No Limit Of Six Withdrawals
There’s no limit on the number of withdrawals in money market funds. All bank savings accounts and money market accounts (not funds) are limited by federal reserve regulation to no more than six withdrawals in a month. Money market funds don’t have such limit. Although you may have never hit the maximum of withdrawals, it’s nice not to worry about it at all.
No FDIC Insurance
Money market funds don’t have FDIC insurance. After the financial crisis, the SEC put in some safeguards on money market funds.
I’m not bothered by the lack of FDIC insurance in money market funds by the mainstream companies (Vanguard, Fidelity, Schwab). I moved my liquid savings to a Vanguard money market fund.
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