In their most recent newsletter, Vanguard had an article about money market funds called Stability for yield: A fair trade? which basically warned investors about leaving their money market funds for other places because the extra return usually comes with extra risk. Usually, yes, but not always!
Of course Vanguard is seeing people flee their money market funds; The Vanguard Admiral Treasury Money Market Fund (VUSXX) is yielding a sad 0.01%. The Vanguard Prime Money Market Fund (VMMXX) is barely beating that at 0.09%. But it’s not their fault, as the average yield on a money market fund is only 0.03%, which means many competitors are earning nothing!
Move Your Money, But Stay Safe
The Vanguard article correctly assumes that such low yields may tempt you to start looking at corporate bonds or funds with longer maturities. But what about the wide world of FDIC and NCUA-insured deposits? The new $250,000 insurance limits per titled accounts are now extended at least through 2013, and with careful titling of accounts, a couple can easily get $1 million covered at one institution.
Here’s a recap of what’s out there:
High-Yield Reward Checking Accounts
These are checking accounts that are still fully insured, usually advertised locally through local credit unions, but also happen to pay a very high interest rate if you jump through some hoops each month. However, if you make a mistake you’ll forfeit virtually all your interest for that month, so it can be tricky. But for the very diligent, their rates are still averaging around 3-5% APY usually on balances up to $25,000. A current example that is available nationwide is Sierra Reward Checking at 4.09% APY on up to $25k, which requires 12 check card purchases each month, a direct deposit/auto-withdrawal, one BillPay per month, and online statements only.
Online Savings Accounts
With most online brokers these days, you can easily link your accounts to online banks and make direct funds transfers. At Vanguard, there is even a little icon that tells me straight up that I can transfer money to and from the money market fund quickly and safely.
Here are some online banks where you’ll likely get a yield that is at least 150 basis points (1.50%) higher than any money market fund, if not much more. One primary drawback here is that you are limited to a maximum of 6 withdrawals per month, as it is a savings account.
- EverBank is offering 1.10% APY for the first 6 months for new accounts. This rate is higher than any 6-month certificates of deposit currently available.
- ShoreBank Direct is offering 1.95% APY on its online savings account with $1 to open and no monthly fees.
- Ally Bank Online Savings recently raised their “no fine print” savings account rate to 0.85% APY as of 11/12/13. No minimums, no monthly fees.
Certificates of Deposit
If you are willing to restrict access to your money for a while (you can get it out early, but must pay a penalty), your yield can go a bit higher, but not that much. As stated above, for 6-months or less go with EverBank. For example, a 12-month CD at Ally Bank will get you 0.98% APY, while stretching out to 3 years will bump you up slightly to 1.20% APY.
In any case, check what your money market fund is yielding right now. Don’t let your cash sit and shrink from inflation in a money market fund, when you can get the same level of government-backed security with a lot more interest elsewhere.