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.
Automatic Adjustment
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.
Say No To Management Fees
If you are paying an advisor a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice.
Mark Caspary says
Alliant Credit Union has a savings rate of 1.045 right now. Vanguard prime Money Market is 1.06 but requires a minimum of $3000 and has an expense ratio of .16. Alliant is my favorite bank and they are fdic insured. If the rates get much higher and Alliant doesn’t raise its rate then I might consider Vanguard again, but for now most of my cash is staying in Alliant.
Harry Sit says
The .16% expense ratio is not relevant because the quoted yield is after the expense ratio.
Mark Caspary says
You are right Harry but if the expense ratio was lower the yield would be higher right? I believe there is ~97 billion in the Prime Money Market they have lots of other funds with less that have lower expense ratios. So you would think with that economy of scale the expense ratio would be lower. I kind of see this as the same thing the banks do when they stall in raising their interest rates?
Harry Sit says
I give Vanguard the benefit of the doubt that 0.16% correctly reflects the expenses it takes to run the money market fund. Fidelity and Schwab charge quite a bit more on similar funds.
Peter says
Mark, credit unions are generally insured by NCUA (National Credit Union Administration), not the FDIC. Same limits and coverages as FDIC, but different federal agency.
dcguy says
Bank savings rates are increasing now and Alliant is not near the top. AbleBanking is now at 1.7% while Alliant is 1.3%. Vanguard MM rate is now 1.45%
Schwab recently reduced their S & P index 500 fund to a 0.03% expense ratio with no minimum balance. So brokerage firms are also discounting their costs.
Don says
Our emergency fund has been in a VG money market account for many years, not because of rate of return, but because we can write checks on that account.
Our cash accumulation accounts (next car, next roof, next big vacation, etc. are at a web bank, but it takes several days to get money from those web bank accounts.
For our emergency fund, same day availability trumps interest rate.
Ross says
these guys pay 3%
“…Our high yielding checking account pays an eye-popping 3% on balances up to $15,000!”
https://www.lmcu.org/banking/checking/checking_max.aspx
SCS1 says
i did the moving around the money quite a bit in my younger days. but now that I am with Ally and Merrill Lynch (ind. stocks, ROTH) as my main accounts; and smaller accounts in 3 other banks. The thought of spending the time of the next big thing is not worth it to me. with that said, it is good to know what it is you are missing (or not). And sadly, I am not in a money market at all so something to think about. for what it is worth…
Walt says
What is the comparable money market fund at Fidelity?
Harry Sit says
Fidelity Money Market Fund (SPRXX) and a number of muni money market funds. Yields are somewhat lower than those on Vanguard funds due to higher expense ratios.
John says
What do you think of CMF ?to park liquid funds?
Harry Sit says
Too volatile for liquid funds. Google shows the 52-week price range was $113 – $122. I’d be bummed if I happened to need to tap it when it was $113.
Bob says
Harry,
Your mention of the CA Muni Mmkt got me to thinking about its safety. CA has been even wackier than usual recently with Single payer medical care with a $500 billion/year price tag passing the Senate, the CO2 regulations that are going to cripple transportation, energy, and farming, and laying down a welcome mat for illegal aliens that cost $billions in welfare, MediCal, education, police and other services. Not only would I not own this fund but I just created a tickler to sell some long term taxable CA munis that I hold in my IRA on July 5. Thanks for the heads up. -Bob
Harry Sit says
It’s a money market fund. According to Vanguard, the weighted average life of the instruments in the fund is 16 days. None of the things you mentioned affect the various entities’ ability to pay in the next 16 days. I heard the single payer health plan is shelved in the assembly. You may be right in selling long-term CA munis, but we are talking about a money market fund here.
Mr Wheat says
I echo Don’s comment. Vanguard MM Prime allows check writing which is a major advantage to me for liquidity. Recently I opened a Cap One 360 money market for the $200 bonus and was surprised at how long ACH transfer took both in and out. Also your “Why Investors Don’t Realize CDs Are a Better Deal Than Bonds” article was great. I am now the proud owner of Andrews FCU 3% CDs.
Mark Caspary says
Just in case anyone is interested I got a notice from Alliant CU that they have raised their interest rate on savings account to 1.11 as of 7/1/17. I do my banking with them and have a checking account as well as their savings account. By the way the checking account also pays interest.
YK says
hey, great website! I’m in a high tax bracket in NYC, and want to park some cash in in a reasonably safe high yielding account or security. It looks like a 5 yr CD yields 2.4%, but of course it’s fully taxable. After reading your posts, I started considering a 5 yr treasury note or a muni bond fund but never considered a muni money market. What are your thoughts on how these compare net of costs/taxes, which funds would you consider for NYC residents (i.e. pay fed, state, and local tax), and am I missing any major options? Thanks!
dcguy says
For New York residents who are looking for tax free income, I would suggest the Vanguard Municipal Money Market Fund (ticker symbol is VYFXX). It has a $3000 minimum investment amount and a current 7 day yield of 0.81% (as of November 18, 2017). You can calculate the after tax yield for other taxable accounts based on your tax bracket for the Federal and State/local tax tables. For example using the 2.4% CD rate as an example, multiply that rate by the tax bracket rate on the Federal and State/local to obtain the percentage figure that will be subtracted from 2.4%. Say that your combined Federal and State taxes are 33%, your computation would come out as 2.4 – (0.33 X 2.4 = 0.792) = 1.608%. This would make the taxable investment better than the tax free investment (almost twice the net yield). It would require for your combined income tax rate to be over 70% (that’s 70 cents per dollar income) in order for the tax free investment to come out more. But, note that this will fluctuate if the CD or tax free money fund rate changes. So the difference will be a moving target.
David says
HI dcguy,
I also live in NYC. I got $80,000 that I want to invest. But I also got $30,000 as an emergency fund. I’m in my upper 40s, not working but I receive $300/week. Not married.
It was recommended that I invest my emergency fund in a MMF. The other $80,000 in a balanced fund. I don’t want a risky investment since I’m unemployed. I’ve read about vanguard investments which are interesting. But I’m open to other funds also. Whats the best investment or investment strategy in your opinion considering the above?
dcguy says
Hello David
Since you are unemployed, it may be risky to put any money in the market, even though balanced funds have lower risk than other types of mutual funds. Many index funds have low costs (Fidelity even has a zero management fee mutual fund), but you have to consider money put into the market as something that you can afford to lose. Vanguard funds do have a record of low management fees. The best performing mutual funds are in the technology sector right now. But, they are very risky and volatile. I would recommend that you put your money into either bank savings account, MMF, or CDs. Depositaccounts.com has a list of best performing bank rates. US Treasury securities are also safe, but they are not convenient to redeem if you need the money quickly. Until you have a dependable income each month such as from a job, I would hold off on putting money into the market.
David says
Hi dcguy,
Appreciate the reply. I think youre right about holding off on the market til I get steady employment. On bogleheads.com the guys there were strongly suggesting that I invest in vanguard index funds with a high risk profile rating of 4 which is too high for me even after I explained my unemployment status.
But fyi, I do have a part time job now that pays $300/week. Let me know if your suggestion for investing has changed because of this. If so, what piques my interest is the ‘Vanguard Total Bond Market Index Fund Admiral Shares’ (VBTLX). Its got a risk profile rating of 2. I want to invest $80,000 for a year in it.
I was also looking into a 1 year CD by Communitywide Federal Credit Union with a 2.25% APY. It looks interesting. But I’m scared of forking over my money to this credit union that I know little about. Would you tell me if theyre trusting?
But if you still feel I should just avoid investing in any market but just in CDs or savings, I’d like to know also. Looking forward to your reply!
dcguy says
Hello David
Many on the Vanguard forums do promote the index funds sponsored by Vanguard. It is often difficult to beat the market with funds that are actively managed and they usually charge higher management fees. During the bear market in 2001-2003 and 2008-2009, even index funds took a significant loss (around 30 to 40%). My retirement funds are in the market and even with the recent volatility, I have stayed with them for over 30 years. They have performed much better than bank products.
If the $300/week part time pay is money that you don’t absolutely need for daily living expenses, then I suppose you could put some it into the market.
Bond funds tend to be less risky than stock funds. With bond funds, interest rate trends control your net return. I placed some money into a short term municipal fund. Over the year, interest rates increased, so the net asset value per share decreased. While I did get tax free income during that period, the loss to my original invested amount wiped away nearly all of the income that I earned. I decided to sell my investment as rates kept going up. Right now, the Federal Reserve has pushed rates downward, making bond fund share prices to go up. The issue with bond funds is that they are controlled by interest rates which you cannot predict at any given time. I think the risk to earn more in a bond fund is negated by the risk of losses during periods of rising interest rates. Bond funds probably lose less than stock funds for any given year period.
Credit unions are pretty safe as they have insurance of a US backed agency of $250,000 per depositor (NCUA). I recently opened an 18 month CD at a community bank at 2.5%. Rates have been moving downward, so I decided to move some of my money out of savings accounts.
Some economists have been predicting a recession that would hurt investments in the market. But so far, nothing like back in 2008-2009 with the subprime financial crisis seems likely.
From the past year, putting money into the market was much better than in a bank or credit union. My account statements prove that fact. But the saying goes that past performance is no indication of future results. I have moved between funds at the wrong time and went to riskier funds right before a bear market. It all depends on your risk tolerance. There are some people who vowed never to return to the market when their investment balance went down by half back in 2009. They all missed out on the market gains since that time.
Note that are also exchange traded funds (ETF) which are popular. They are different from the traditional stock/bond funds in that the share price is not fixed and you can trade them similar to stocks with a bid/ask price of your choosing. But, like stock trades, it is not guaranteed that your bid/ask price will be accepted by the market. Vanguard has many ETF offerings.
For the long term, the money is better put into the market, in my opinion. With interest rate trends since the 1980s, putting money solely to bank accounts only was better during bear markets which only lasted a few years or less. That requires timing which many often cannot predict.
I know some people at work who have a million dollars in their retirement account by being 100% in the market for over 30 years. Had they put that money into the bank for that same time, they would have seen an increase, but only by a few percent per year. With inflation and cost of living increases per year, that often will not cover your future.
But in your case, the long term horizon investing may not be your primary concern if your personal daily budget needs are more important.
Sean Breidenthal says
It is 2022, what is better now? HYSA are between 3-4%, treasury bills are around 4-5%, and Money Market Funds are also about 4%
Harry Sit says
I’m going with a money market fund now. See the updated Guide to Money Market Fund & High Yield Savings Account.