See Why Americans Moved $1 Trillion Into This Unique Type of Savings Account Last Year
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Americans are sick and tired of getting near-zero yield on their savings. In case you haven't noticed, APYs are at 5.00% or higher -- and that means your extra cash in the bank can actually earn money.
But that doesn't mean your options are limited just to a typical bank savings account. Along with the best savings accounts, which pay 5.00% APY or higher today, there's another type of safe, liquid, short-term savings vehicle where you can earn similarly high yields: it's called a money market fund.
According to research data cited by Bloomberg, during 2023, the amount of cash invested in money market funds increased by more than $1 trillion -- the highest one-year increase ever.
Let's look at what makes money market funds so special, and how you can use this type of account to earn higher return on investment (ROI) on your cash.
What are money market funds and how do they work?
Money market funds are not bank accounts -- they are a type of mutual fund, offered by brokerages and investment firms. But instead of investing in stocks or bonds, a money market fund invests in the "money market" -- low-risk, short-term securities like cash, CDs, and government debt.
Some money market funds also invest in bank securities and corporate debt; these can be slightly riskier than government mutual funds, but can also offer higher ROI. Other money market funds invest only in municipal bonds, and the yields they earn are exempt from federal income taxes -- but the yields on tax-exempt money market funds are slightly lower than the highest-ROI funds.
Because of the special ways money market funds are invested, they can often deliver a higher yield than a typical bank savings account -- even some of the best savings accounts. There is sometimes a slightly higher risk of investing in money market funds compared to leaving your cash in the bank. But if you choose a brokerage account that is SIPC insured, you will have a similar type of protection to FDIC insurance with a bank account.
How to invest in money market funds with your brokerage account
If you want to put cash into a money market fund, you can look for this type of mutual fund within your brokerage account. With a money market fund, you buy shares of the fund in the same way you'd buy shares of stock or bond ETFs -- but the price of a money market fund is typically $1 per share.
Although the share price of your money market fund will not go up, it should earn a yield based on the performance of the short-term investments held by the fund. Unlike CDs, money market funds do not pay fixed interest rates. Instead, the yield fluctuates constantly as the fund buys and sells short-term securities that pay slightly higher or lower interest, based on market conditions.
The best money market funds today are paying over 5.00% variable APY. Money market funds typically calculate their ROI in the form of "7-day SEC yields" -- an annualized percentage based on recent performance. Here are a few money market funds offered by prominent investment firms, with their 7-day SEC yields (as of May 14, 2024):
Fidelity® Government Money Market Fund: 4.95%
Schwab Value Advantage Money Fund – Investor Shares: 5.16%
Vanguard Federal Money Market Fund: 5.26%
Before you choose a money market fund, pay attention to the fund's fees, also called the "expense ratio." Some investment firms charge lower fees than others, and this can make a difference in how much ROI you actually get to keep from your money market fund investment.
Money market accounts: How to get similar yield with FDIC insurance
Money market accounts are not quite the same thing as money market funds, but they operate in a similar fashion. With a money market account, your cash is invested in short-term securities like a money market fund -- but you get FDIC insurance just like you'd have with a bank savings account.
The best money market accounts are paying higher than 5.00% APY now. Another benefit of money market accounts is that they sometimes offer check-writing privileges or come with a debit card, so you can use your savings for easy cash withdrawals or to pay occasional bills. You shouldn't use your money market account for everyday checking, but it can be a nice perk.
Bottom line
Money market funds give investors flexible access to cash with an appealing combination of low risk and 5.00% (or higher) yields. It's no wonder that people have moved $1 trillion of cash into money market funds during the past year of high interest rates. With the high yield and liquidity of money market funds, keeping some cash in your brokerage account can be a good strategy for your savings.
If the Fed continues to leave interest rates high, money market funds could continue to be a good place to keep your savings. If you want some of the same investment style and high yields of a money market fund, but within a bank account, you can open a money market account -- and get 5.00% APY (or higher) with FDIC insurance.
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