Money Market Rates Update

Money market funds continue to offer competitive yields for investors seeking a safe haven for their cash reserves. As of late 2024 and into 2025, major brokerages are offering yields that surpass traditional savings accounts, making money market funds an attractive option for short-term savings and emergency funds.

Current Money Market Fund Yields at Major Brokerages

The current interest rate environment has created favorable conditions for money market fund investors. Here’s how the major players compare:

Fidelity Government Money Market Fund (SPAXX) is currently yielding around 4.95% with a low expense ratio of 0.42%. This fund invests primarily in U.S. government securities and repurchase agreements, making it one of the safest options available.

Schwab Value Advantage Money Fund (SWVXX) offers competitive yields near 5.0% with an expense ratio of 0.34%. Schwab’s offering invests in a mix of government securities and high-quality commercial paper.

Vanguard Federal Money Market Fund (VMFXX) stands out with its ultra-low expense ratio of just 0.11%, currently yielding approximately 4.85%. This fund focuses exclusively on U.S. government securities.

How Money Market Funds Work

Money market funds are mutual funds that invest in short-term, high-quality debt securities. They aim to maintain a stable net asset value (NAV) of $1 per share while paying dividends that reflect short-term interest rates.

These funds typically invest in:

• U.S. Treasury bills and notes
• Government agency securities
• Repurchase agreements
• Commercial paper from highly-rated corporations
• Certificates of deposit from major banks

Dividends are usually paid monthly and can be automatically reinvested or transferred to your brokerage account. The funds provide daily liquidity, meaning you can access your money whenever you need it.

Money Market Funds vs. Savings Accounts vs. CDs

Understanding the differences between these cash management options is crucial for optimizing your returns:

Money Market Funds currently offer the highest yields (4.5%-5.0%) with daily liquidity and no early withdrawal penalties. However, they are not FDIC-insured, though they are extremely low-risk.

High-Yield Savings Accounts typically offer 4.0%-4.5% APY with FDIC insurance up to $250,000. They provide unlimited access to funds but may have lower yields than money market funds.

Certificates of Deposit (CDs) lock your money for a set term (3 months to 5 years) in exchange for a guaranteed rate. Early withdrawal typically incurs penalties, but you get FDIC insurance protection.

Tax Considerations for Money Market Funds

Understanding the tax implications of money market funds can help you maximize after-tax returns:

Federal Taxation: Interest from government money market funds (like SPAXX or VMFXX) is fully taxable at the federal level as ordinary income.

State Tax Exemption: However, money market funds that invest primarily in U.S. Treasury securities may be exempt from state and local taxes. This can be significant for investors in high-tax states like California or New York, effectively boosting your after-tax yield.

For example, if you live in a state with a 10% income tax rate, a government money market fund yielding 4.8% could have an effective after-tax yield of 5.3% compared to a fully-taxable alternative.

How to Evaluate Money Market Funds

When choosing a money market fund, consider these key factors:

Expense Ratio: Lower is better. Vanguard’s 0.11% expense ratio means more of the yield goes to you. A fund yielding 5% with a 0.5% expense ratio nets you 4.5%, while one with 0.1% nets you 4.9%.

Minimum Investment: Many money market funds have no minimums at major brokerages, but some may require $1,000-$3,000 to start.

Seven-Day Yield: This standardized measure shows the fund’s annualized yield based on the past seven days, allowing for fair comparisons.

Fund Holdings: Government-only funds are safer but may yield slightly less than prime funds that include corporate securities.

When to Use Money Markets in Your Portfolio

Money market funds serve several important purposes in a well-structured portfolio:

• Emergency Fund: Keep 3-6 months of expenses in a money market fund for easy access during unexpected situations
• Short-Term Savings: Saving for a goal within 1-2 years? Money markets protect principal while earning competitive returns
• Dry Powder: Keep cash available for investment opportunities without sacrificing yield
• Retirement Account Cash: Hold your IRA or 401(k) cash position in money market funds rather than earning minimal sweep rates

While money market funds won’t build long-term wealth like stocks, they are an essential component of a balanced financial strategy, providing safety, liquidity, and competitive yields for your cash reserves.