Money Market Fund vs High Yield Savings Account:
The profitability of money market funds remained at 0.01% a few years after the financial crisis. Some fundraisers had to pull money out of their pockets to keep the return at 0.01%. Meanwhile, some banks kept their high-yield savings accounts close to 1% with FDIC insurance. It was no problem to use high-yield savings account instead of a money market fund for net savings. I said this in 2014 when I stopped using Vanguard Money Market Fund.
Time has changed. After several Fed rate hikes, money market funds posted quick gains, while banks couldn’t keep up. The profitability of the Vanguard Prime Money Market Fund (VMMXX) is now 1.05%. The banks slowly increased the yields on their high-yield savings accounts to just over 1% (at the time of this writing, Ally 1.05%, CIT, Synchrony, Barclays 1.15%, GS Bank 1, 20% “, some others at 1.25% or 1.30%) They can count on people who will not realize higher returns than money market funds. If money market funds had the same margin as before, the return on savings accounts would now be around 2%.
If you have a higher tax rate, including income tax, money market funds are also a good option. The Vanguard California Municipal Money Market Fund’s return is 0.68%. Although the mortgage is lower, California investors in a higher tax bracket may be considered more tax-free than a taxable fund.
Money market funds have several advantages over high yield savings accounts. The yield automatically adjusts to the market for short-term instruments. As short-term interest rates rise, you automatically get the highest return minus the expense ratio charged by the fund. You are not dependent on a bank’s willingness to determine when the interest rate on your savings account increases. You don’t need to switch between banks if the current bank you use decides to delay when other banks raise their rates.
No limit of six shots
There is no limit to the number of withdrawals in money market funds. All savings and money market accounts (not funds) are limited by Federal Reserve regulations to a maximum of six withdrawals per month. Money market funds do not have this limitation. Although you may never have hit the maximum number of hits, don’t worry.
No FDIC insurance
Money market funds are not FDIC insured. After the financial crisis, the SEC introduced some precautionary measures for money market funds.
The lack of FDIC money market fund insurance from large companies (Vanguard, Fidelity, Schwab) doesn’t bother me. I transferred my net savings to a Vanguard money market fund.