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It’s time to use money funds again

By Don Gross, CFA

After the 2008 financial crisis interest rates got so low that all short, safe securities paid almost no interest. Bank savings accounts became attractive as banks pushed rates higher to attract new funds. During this time, we closed our money market funds and spread our client’s cash management funds over multiple banks (due to the $250,000 FDIC limit).

In the last year, rates have risen enough that the money market funds are now attractive again and beat the average bank money deposit account by 0.5%. Vanguard Prime Money Market Fund yields over 2%, while the bank average is 1.5%. I am recommending that my clients move their longer-term savings from the banks into the Vanguard money fund.

I recommend Vanguard because of their low fees and high quality management style. The fund is easy to set up online, and you have the ability to connect your checking account with the money market fund for both deposits and withdrawals. Vanguard will even provide checking on the money fund if you desire.

Another nice feature of the money funds is that as rates rise, the fund will increase its yields with the market. Banks are reluctant to increase rates, so it might be some time until your savings account reflects the new higher rate.