Money market funds have gotten surprisingly interesting lately, which is a weird sentence to write. As someone who ignored these things for years, I’ve had to learn everything about them now that yields are actually worth paying attention to. Today, I will share it all with you.
These funds are basically offering yields that blow traditional savings accounts out of the water. If you’ve got cash sitting around earning 0.5% at your local bank, you’re leaving real money on the table.
What the Big Three Are Actually Paying Right Now
I keep tabs on the major players because I’m apparently the kind of person who finds this stuff interesting. Here’s what I’m seeing:
Fidelity Government Money Market Fund (SPAXX) – running around 4.95% yield with a 0.42% expense ratio. Invests mostly in government securities and repos. About as safe as it gets without stuffing cash in your mattress.
Schwab Value Advantage Money Fund (SWVXX) – hovering near 5.0% with a 0.34% expense ratio. Mix of government stuff and high-quality commercial paper.
Vanguard Federal Money Market Fund (VMFXX) – around 4.85% yield, but here’s the thing: the expense ratio is only 0.11%. Vanguard being Vanguard. Government securities only.
How These Things Actually Work
Money market funds are mutual funds that invest in short-term, boring debt. They aim to keep their share price locked at $1 while paying you dividends based on current interest rates.
The typical portfolio includes Treasury bills, government agency stuff, repurchase agreements, commercial paper from companies like Johnson & Johnson or Microsoft, and bank CDs. Nothing exciting, which is the point.
Dividends usually hit monthly – you can reinvest them automatically or sweep them to your brokerage account for spending. The liquidity is basically instant. Need your money tomorrow? You’ve got it.
Money Markets vs. Savings Accounts vs. CDs: Which Actually Wins?
I’ve done this math multiple times for different situations. Here’s how I think about it.
Money market funds are paying 4.5% to 5% right now with no lock-up period and no early withdrawal penalties. The catch? No FDIC insurance. But government money market funds are investing in Treasury securities backed by the same government that runs FDIC, so the practical risk is close to zero. I’m apparently one of those people who finds this acceptable and keep my emergency fund here.
High-yield savings accounts are paying 4% to 4.5% with full FDIC insurance up to $250,000. Unlimited access. Lower yield than money markets but some people sleep better with that FDIC sticker.
CDs lock your money up for 3 months to 5 years in exchange for a guaranteed rate. Break the lock early and you pay a penalty. The rates aren’t meaningfully better than money markets right now, so I’m not sure why you’d bother with the restrictions.
The Tax Angle Nobody Talks About
Here’s something that changed how I park my cash.
Money market funds that invest in U.S. Treasury securities are often exempt from state and local income taxes. Only federal taxes apply.
If you live in California, New York, or another high-tax state, this matters. A government money market fund yielding 4.8% might have an effective after-tax yield of 5.3% compared to a fully-taxable alternative.
That’s what makes these funds endearing to us folks in high-tax states – the boring government-only funds sometimes beat the higher-yielding prime funds on an after-tax basis.
What I Actually Look For When Picking One
After comparing a bunch of these, a few things stand out.
Expense ratio matters more than you think. Vanguard’s 0.11% means you keep more of the yield. A fund paying 5% with a 0.5% expense ratio nets you 4.5%. One with 0.1% nets you 4.9%. Multiply that by a $100,000 balance and suddenly we’re talking about real money.
Minimums are usually not a problem. Most major brokerages dropped their minimums years ago. But check anyway.
Look at the seven-day yield. This standardized number shows the annualized yield based on the past week. It’s the best apples-to-apples comparison.
Government-only vs. prime funds. Government-only is safer and often gets that state tax break. Prime funds that include corporate paper might yield a hair more but add a sliver of risk.
Where I Actually Use These
My emergency fund sits in a money market fund. Three to six months of expenses, earning competitive yield, available the next day if my car explodes or my furnace dies.
Short-term savings for goals coming up in the next year or two – money market. Saving for a kitchen renovation next summer? This is where that money lives.
Dry powder for investment opportunities. When the market tanks and I want to buy the dip, having cash earning 5% beats earning nothing while I wait.
The cash portion of my IRA and 401(k). Some plans default to sweep accounts paying 0.1% or less. Switching to the money market option is usually just a few clicks.
Look, money market funds aren’t going to make you rich. They’re not supposed to. They’re for the part of your financial life that needs safety, liquidity, and competitive yield without drama. And right now, they’re actually paying attention-worthy returns.
