Money Market Funds vs. High Yield Savings Accts

[DawgMan]

As I transition into RE and begin to plan/structure my cash bucket, for the first time, I started to investigate some of these high yield savings accounts. As I have been in the accumulation stage, I have stayed pretty well invested at my targeted AA leaving only "working capital" in cash, typically in a money market account. So now, as I look at the options to hold up to 3 years living expenses in Bucket 1 (combination of cash and short bond funds/ETFs), I took a look at some of the high yield savings accounts and to my surprise, I am seeing yields of 1.75% up to $1M (i.e. BMO Harris Bank) as compared to my Schwab Money Mkt yielding .59%. I have not dug into the fine print, but why would anyone use a money mkt fund for their cash bucket (or any cash for that matter) when these options exist? What am I missing?

 

[audreyh1]

Nothing. An FDIC insured banking account paying a higher yield is the better option. Just pay attention to the insurance limits per banking institution.

Savings accounts and short-term CDs don’t always yield more than short-term treasuries or MM funds, but when the Fed Rate is very low like it often has been since the last recession they do.

 

[RE2Boys]

Note that most high yield savings accounts limit you to only six withdrawals per statement cycle. Plan you withdrawals carefully! I use both and will move money between the two depending on when I will need the funds and which is paying the higher interest rate.

 

[audreyh1]

Right, it’s not that hard to organize the cash flow, just don’t try to use it like a checking account!

I’ve been using high yield savings as the place to park my annual spending since 2013, doing monthly transfers from there to checking accounts as needed.

A couple years later I opened up another to use to store most of the cash balance in my taxable brokerage account as transfers were next day and MM funds were paying essentially 0.

I opened yet another in conjunction with buying short-term CDs.

 

[mageedge]

If you are talking about parking a significant amount of cash in the account, you may also want to look at "no penalty CD's" - usually an 11 month term and you can withdraw principal plus accumulated interest without penalty during that 11 month period (after an initial waiting period of c.5 days).
Interest rates, currently, are very similar to savings accounts however the rate is fixed for the 11 month period.
Note the withdrawal option is "all or nothing" so stash your cash in several of these CD's rather than one large one.

This product is interesting now because savings rates are dropping quickly and likely to approach zero until we're climbing out of the Covid-19 economic fallout. Over the 11 month period you'll probably end up averaging 1%+ more than savings account - and, if the equation changes, simply pull the money out of the CD and put in into savings.

 

[jazz4cash]

... I have not dug into the fine print, but why would anyone use a money mkt fund for their cash bucket (or any cash for that matter) when these options exist? What am I missing?

I have often wondered the same thing but I never thought it was worthwhile to investigate. Many online banks offer both. Ally right now has high yield savings @ 1.5% vs MM @ 0.75%. How could it be worth that much to get > 6 withdraws per month? If you do need >6 just open spousal account or use another bank

 

[audreyh1]

If you have most of your retirement assets in an IRA brokerage account, it’s not so easy to more funds between institutions. That’s a limitation for some folks.

MM accounts at banks are a different financial asset than MM funds you buy at a brokerage.

 

[jazz4cash]

If you have most of your retirement assets in an IRA brokerage account, it’s not so easy to more funds between institutions. That’s a limitation for some folks.

MM accounts at banks are a different financial asset than MM funds you buy at a brokerage.

Yeah, but that's a different issue more related to arcane IRA rules. I actually have the most resistance moving funds into and out of credit union IRA accounts.

 

[jazz4cash]

I have often wondered the same thing but I never thought it was worthwhile to investigate. Many online banks offer both. Ally right now has high yield savings @ 1.5% vs MM @ 0.75%. How could it be worth that much to get > 6 withdraws per month? If you do need >6 just open spousal account or use another bank

Edit. Just noticed the MM at Ally is also limited to 6 withdrawals per month and it's FDIC so I guess it's technically a MM account vs. MM mutual fund