If you have cash sitting in a money market mutual fund right now, chances are the yield is quite pitiful. Have you checked recently? The average yield on a money market fund is only 0.09%! Even the usually competitive Vanguard Prime money market fund (VMMXX) is only paying a 0.23% yield, and the highest paying retail Fidelity fund is eeking out a 0.44% yield. (Numbers as of 8/3/09.) There’s little if any benefit to switching to a Treasury or Municipal money market fund, either.
Such low yields may tempt you to start looking at corporate bonds or funds with longer maturities. However, by chasing any of these you start risking your principal. Definitely avoid anything with “high-yield” in the name for your cash needs. Why not explore the world of FDIC and NCUA-insured deposits? The new $250,000 insurance limits per titled accounts are now extended through 2013.
High-Yield Reward Checking Accounts
These are checking accounts, usually through local credit unions, that 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. In addition, these accounts also only pay the higher interest on a limited balance, usually $10,000 or $25,000. But for the very diligent, their rates are still averaging around 4-5% APY on balances up to $25,000. Here’s one recent example at 4.01% APY that requires 10 check card purchases each month, a direct deposit/auto-withdrawal, and online statements.
For more, see my review of rewards checking accounts and also a list of participating banks by state here. I’d stick with small local banks with limited membership eligibility if possible, the rates tend to be more stable.
Online Savings Accounts
With most online brokers these days, you can easily link your accounts to online banks and make direct funds transfers. Online savings accounts like FNBO Direct or Ally Savings offer $250,000 of FDIC-insurance and easy liquidity. You’ll likely get a yield that is at least 100 basis points (1%) higher than any money market fund. However, you are limited to a maximum of 6 withdrawals per month.
Bank CDs & Short-Term Promotions
If you have a large amount of money to invest, and you don’t need immediate access to the funds, you can still get around 3% APY for short periods of time. For example, Everbank is offering 3.01% APY for the first 3 months for new accounts. WT Direct has a promotion that can earn you 3.2% APY for a 2.5 month commitment. To me, a short-term promotion is the same thing as a bank certificate of deposit, since many banks offer nice rates and then drop them when up for renewal.
When you’re done with the term, perhaps money market mutual fund rates will be tolerable again!