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MY WIFE AND I have around $50,000 of emergency funds (~8 months of expenses). Considering that the job market is shaky, we feel comfortable holding this much cash.
Of course, it’s important to make the most out of your savings, so I want to share some options available to earn ~4% yield on your money.
Keep in mind that you should only use the following options for emergency savings and specific saving goals (e.g. a downpayment for a house).
Here are some options available to you depending on your goals, tax situation, and desired yield:
A savings account is a decent option to store your emergency funds/savings. Savings accounts are FDIC insured up to $250,000 (some might offer even more), so your money is generally protected.
You should typically evaluate savings accounts based on:
Currently, some of the banks that pay 4%+ are no-name banks that you’ve never heard of. Some of them are part of the bigger banks, but have no in-office branches.
Here are some options that you’ve may have heard of and their yields:
If you do want to open a HYSA, take some time to research these banks using the criteria above. I personally used CIT Bank for my savings some time ago, but switched because of their poor user interface and login issues.
The main benefit of using a HYSA is the FDIC insurance, which might not be applicable to other options discussed further:
2. Money Market Fund
Big brokerages like Vanguard or Fidelity offer Money Market Funds (MMFs).
Money Market Funds are mutual funds that try to maintain a stable share price of $1. These funds invest their assets in cash, U.S. government securities, and/or repurchase agreements.
For example, Vanguard has 2 main ones:
VMFXX (Vanguard Federal Money Market Fund) with a 3.89% yield. The portfolio composition is:
VUSXX ( 3.88% yield with composition:
VUSXX is generally a better option as of now because it has an identical yield, but more of the income will be exempt from state and local taxes since it holds T-bills.
Keep in mind these two funds are not FDIC insured. They are SIPC insured, so if anything happens to Vanguard or Fidelity, your money may be protected.
However, it’s possible that the share price can go below $1. In 2008 and 2020, the Federal Reserve stepped in and provided liquidity options to prevent that from happening.
It will take you about T+2 days to withdraw money from this fund. Both funds have over $100 billion in assets.
I personally use VUSXX for my savings. However, if you are in a 37% marginal tax rate, you may also consider a Municipal Money Market Fund. Because it’s not taxable on a federal level (and in some instances on the state level too), people who are in a high marginal tax rates might get a bigger after-tax yield by holding them.
3. T-Bills
Treasury bills (T-bills) are short-term debt instruments issued and backed by the U.S. Treasury. Treasury bills are issued for terms of 4, 8, 13, 17, 26, and 52 weeks.
T-bills can be purchased from banks, brokers (like Fidelity), and directly from the Treasury through Treasury Direct (this website is absolutely terrible to navigate!)
Current yields:
T-bills are exempt from state and local taxes. These are as safe as savings accounts as they are backed by the Treasury. The only problem is that your money is locked in for that length, unless you sell early in a secondary markets.
If you don’t want to buy Treasury bills directly from Treasury Direct or other brokers, there are ETFs (e.g VBIL 3.86% yield) that only hold T-bills. However, they have expense ratios, so your yield typically will be lower than buying directly.
Overall, I personally suggest Money Market Funds or HYSAs. They are the easiest to understand and work with, but you have to decide which product makes the most sense for you.
Just don’t use banks that pay 0.01% interest!
Which option do you currently use? Let me know!
Bogdan Sheremeta is a licensed CPA based in Illinois with experience at Deloitte and a Fortune 200 multinational.
For part of our emergency fund I agree with the eight reasons cited by David Enna who blogs at TIPSwatch and many other notable financial writers cited in the post to have a position in I-Bonds.
Mr. Enna has a tab titled I Bond Manifesto – Why inflation-linked savings bonds can work as part of your emergency fund if you are interested in their thinking.
Currently issued I bonds have a rate of 4.03%. This includes a fixed rate of 0.90% and the I bonds issued now will have this rate until April 30, 2026. I do not mind the clunky TreasuryDirect website.
My investment choices for cash equivalents are SGOV, Treasury Ladder, and I-Bonds