The Best Place For Your Cash: Savings Accounts, Money Markets, or CDs?
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- čas přidán 5. 07. 2024
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A common question in personal finance and investing is where should we put our cash? Whether it’s an emergency fund or even cash we’re holding to invest with down the line. Most people choose between savings accounts, CDs (certificate of deposit), or money market funds. In this video we break them down, talk about the pros and cons, and I share what I’m actually doing with my cash.
00:00 Savings Accounts, CDs, or Money Market Funds
02:26 What are the Pros and Cons of each?
11:40 Who are they best for?
13:21 What am I doing with my cash?
*I am not a licensed professional or a financial advisor. This content should not be taken as financial advice. It is meant for educational and entertainment purposes only. All opinions and perspectives are based on my own personal financial situation, experiences, and goals. Please ensure that you do your own due diligence before making financial decisions and/or meet with a professional. Links above include affiliate links, which means I may receive a commission at no additional cost to you.
From someone who uses a CD to hold their emergency fund, its useful if you think rates are getting cut soon (or that the market *thinks* rates will be cut) and you want to hedge downside risk (i.e. interest rate risk) you would see in bond investing (which is what your version of MM funds are exposing yourself to).
I have a MM that functions as a HYSA, but i had never heard of the bond MFs refered to as MM accounts.
When it comes to bond investing people only ever think of defualt risk and almost never about reinvestment risk and interest rate risk. Both of which are market forces.
Strictly in terms for "safety funds" you want something liquid enough to be able to access them in case of an emergency, but not so liquid that you will be tempted to invest or spend on anything but true emergencies. Just my thoughts.
Thanks for explaining why you use CDs, I appreciate it!
T-Bills purchased through Fidelity or from Treasury Direct-GOV are exempt from State Income Tax which could save you 5-7% depending on your state tax rate. Yields right now are just above 5% with 12 mo maturity date. T-Bills can be sold before 12 mo maturity date with a reasonable penalty if there is an emergency need. Not as easy as Money Market but much better yield is baked into the return if you live in a state that charges 5-7% income tax! My short holdings are about 50/50 split between MM and T-Bills.
For me, I've transitioned taxable cash to BOXX, currently ~5.76%. For IRA have cash 60/40 split between USFR (5.3%) and SPHY (7.78%). SPHY a little riskier so can dial-in to risk tolerance.
Another banger video! This channel is kind of a gem I don’t want people to flock too and over saturate 😂 I want it to a small group of people. But that wouldn’t support the channel lol edit: I say 3-6 months living expenses in HYSA and the rest in money market or short term TBILLS
Thanks!
Biggest risk with CDs is actually that the CD gets called as rates fall. Maybe more of an annoyance than a true risk but with a CD you get no upside on interest rates and all of the down.
Most the callable CDs can be called after 6 months, you can just treat them like a 6-month treasury for the yield.
They are not all callable, but yea…
@@AnthonyLopez-di5vv that is true, but you are probably a 100 basis points off money market yields if you want call protection. CDs always feel like the worst of all the available options, reduced flexibility for almost no yeild gain. It really does feel like a product from a bygone era when treasuries were a bit harder to access as a retail investor. You had a checking account at your bank and the bank sold you a sleepy old CD. Just doesn't feel like they have a real role to play if you are using a full service broker. For sure money market rates will move next day on a rate lowering and CD rates will be a bit more sticky, but just doesn't seem sticky enough to justify the reduced access vs a brokerage money market or a short term treasuries ETF. Just 2 cents from a random person on the internet, but thats why I don't use CDs and prefer money markets.
6 month t-bills are offering 5.45% YTM , pretty good if you want to stay invested for 6 months , otherwise CD and HYSA
Genuine question - I can understand direct T-Bills but why do you prefer CDs and HYSAs over money market funds especially when you can get treasury only funds?
@@mattderron because t-bills , cd and HYSA are safer than money market . look at 2009 , and CD ad HYSA are linked to my checking account for liquidity and FDIC protection
Did you watch the part of my video where I talked about this? The money market fund I use is US Treasuries only. IMO the risk profile is the same as bank deposits in that case. Both backed by insurance that is dependent on the US government not defaulting on its debt. Is there a different risk you see?
@@mattderron Money market funds have expense ratio too , and risk is higher
The expense ratio is already account for in the yield (ie yield is after expense is taken out). In terms of the risk I think it depends on what type of money market you are looking at. I tried to explain this a bit in the video, but obviously everyone should do what they are comfortable with
Matt, Schwab has a municipal bond MMF Municipal bonds are federal tax free. Depending on one’s tax bracket, the savings could be substantial even though the interest rates are lower than regular MMF.
HYSA and CD. Both over 5.% so I can’t complain so far.
Emergency fund has been in ibonds since the rate was around 10%. Extra cash that I dont need in the near future is in the brokerage (primarily VOO). Have any savings that ebbs and flows in a HYSA.
Yeah I got boned with a CD where I locked the rate and the fed kept raising rates so I basically was locked for 9 months at a rate that matched what most HYSAs were.
Great Video! Money Market for me.
Thanks!
Tip: If you have a money market fund that has some dividends from US Treasuries, you need to indicate this manually when you file your taxes. The 1099 doesn't separate it for you. I made this mistake my first year with mm funds. Oops!
Is that for state taxes? Or federal? I hadn't heard about that, but I live in Texas so I only do federal...
That is to get the exemption for state income taxes. So it would only apply to states with an income tax.
CD's, Ive tried it before and totally despised it. Easy to open, a hassle to get your money and the fact that you still get taxed on money thats still Maturing.
I have my Savings in a HYSA but also a very small amount in the brick and mortar bank's Saving account just in case if I ever need access to a chunk of cash in an instant which in my case, it has happened before where waiting a day is not an option.
Atm, if I have a target date, I would prefer a Treasury Bill/Note/Bond with a high Yield/Discount/Coupon Rate over opening a CD.
For retirement accounts which tax is not an issue, I only look at yields. If broker CD yields is more than 5.4% for 1 year, then it's a good option. Otherwise stay in T-bills for 3 months or less. Put in 6 months if yield is more than 5.3%. Treasury is more liquid and most often if the fund is needed, you won't loss the money by selling out.
Honestly these days rates on HYSA, CDs, and MM are very similar. And with interest rates staying higher longer than expected, doesn’t this all boil down to differences in liquidity? I see little value in CDs given the overall economic context
Agreed, liquidity and difficulty in overall setup I would imagine are the determining factors for most people?
Is there some taxation difference between saving account and money markets which need to be taken into account?
Yes can be, depends on the money market fund you choose. Some munis give better tax treatment. Some federal are taxed at federal level but only partially at state level. So it depends on your situation and what fund you're looking at.
I keep my savings in a hysa. I don't want to pay the fee for a money market account. or is the small fee negligible?
Good question - what fee do you mean? Are you talking about the expense ratio?
@@mattderron yes. My assumption it’s same as with a stock? Do correct if I’m mistaken.
There's a couple things - in terms of the expense ratio the yield that is advertised already accounts for the expense ratio. So for example VUSXX has a 5.28% yield showing today and a 0.09% expense ratio. That 5.28% is after the expense ratio is already taken out.
In terms of fees / costs to buy or sell the fund. That may depend on your broker, and is actually a really good point that I didn't address. In my situation, each trade is free. Each buy of the Vanguard mutual fund is free so I don't even think about it. But if you're using a broker that charges for those things, then absolutely it should be a consideration!
Hope that helps.
@@mattderron ah got it. Definitely will be looking more into it and perhaps move funds over. Thanks.
Matt, great information, but is there a tax-exempt money market fund you could recommend? Thanks!
I'm not very familiar with any specific one, so I don't have anything real intelligent to say about it and wouldn't want to recommend any one in particular.
For myself I live in a no income tax state (Texas) so I only have to worry about federal taxes. In this case for my cash, I prioritized risk (treasuries only) over tax efficiency. But that's just me. 🤷🏻♂️
There are muni money market funds where you need to figure out the lower yield vs tax equivalent. I found them not to be worth the hassle but they have them and you may find a state specific one that can save on the state taxes.
Another great video, thank you!
Thank you!
I'm surprised this did not include treasury bonds; short term bonds are paying 5% and you can drip through three month bonds
It didn’t include them directly but included the short term treasury funds which I am using. Still 5%+ and slightly more convenient
Money market for me and I started CD ladders going until March of 2025, nothing crazy, but I'll add a CD here and there when rates pop a little. Got one earlier in the week at 5.45% locked until Nov then it can be called away. When rates start to get cut, 2025 now???, I'll pour into TLT and get that on a big bounce up.
What about 0-3 Month Treasury Bond ETFs like BIL and SGOV?
Yes they are great too. I didnt get to it in the video, but I used SGOV for my investment cash when I’m sitting on it. Similar / same risks as VUSXX just from a different provider and in ETF form
@@mattderronever heard of BOXX? A tax- conscious alternative to SGOV. Check out Optimized Portfolio's video on it
@@mattderronI keep any medium-longer term cash in SGOV. Happy so far.
What about no penalty CDs? There are some with fairly high rates
Is there a reason you would prefer that over a treasury fund?
@@mattderron
Not me. But there are some who are maybe more comfortable with CDs who don't know about no penalty CDs. I've seen them as high as 5%.
I use SGOV
Oh I see. I personally don't see the allure of CDs other than if someone wants to lock in a certain rate (they think rates will go down) or they really just want the highest rate at their bank and not at a brokerage.
That's why I was asking, because I'm curious why people are picking CDs, if there's a reason I'm missing, or they think money market funds aren't as safe. In some cases they are not though.
@@mattderron CDs in a brokerage account are bought without a bank purchasing them for you, which is the case with bank CDs. In turn, you receive a higher interest rate in most cases. Brokered CDs traded as high as 5.50% for up to 1 year. 18 month brokered CDs reached 5.20%. The main goal of CD investment is to postpone interest rate decline. Since that isn't likely to occur to any significant extent this year, CDs are less attractive than other fixed income investments.
Dear Matt,
Could you make a video or post on what qualifications or what to look for in a company? Ive been trying to do a fundamental analysis of certain companies and bought stocks into CSX, SNA, CAT, DEERE, BRK and others. My plan is to build up my position over a span of 3-5 years and then sell. I keep feeling uncertain about my investing and whether it'll work. Do you have any advice?
Btw, my name is also matt
Hi, sorry for the delay. It depends on a lot of factors but take a look at videos in this playlist. I do analysis on stocks in each video and go though my process for doing so. It should give you some ideas - Stock Analysis & Reviews
czcams.com/play/PLBFL5VuIWtg5TrogzDov5VRimutrdruuN.html
One option is you may want to consider is TBIL or SGOV ETF's these you can buy through most brokrage accounts very liquid and very stable. Maybe you could do a video and let us know what you think.
For sure I mentioned it other comments - I’ve used SGOV for “investing cash” before and it works great. Very similar risk profile to VUSXX just in ETF form and from a different provider
HYSA #1
(Insert obligatory comment about how wisely performing one transaction and leaving your money in a CD / MM fund / savings account and not touching it for several months is the exact same thing as day trading)
😂 this is my favorite comment
100% money market
Is VUSXX better than SGOV?
Very similar, I use SGOV for my “investing cash” since it trades throughout the day. Similar risk profile as VUSXX just a different provider and in ETF form
We maintain a small cash balance with our brokerage backed up by a money market invested in US federal obligations. Not mentioned are T Bills. Short duration (8 weeks to a year) and currently have APYs from 5.3%-5.5%. Their tax equivalent yield is even better as they are not subject to state income tax if that applies. It's easy to build a maturity ladder. During the market doldrums of 2022 to early 2023 we had several consecutive months of maturities to employ if our allocation warranted some adjustment. Risk is practically non-existent. They are highly liquid should they need to be sold but would be subject to settlement time frames and fund transfers. Depending upon the rate environment a sold T Bill could result in a gain or a loss but with short durations proper planning can avoid such complications. I personally prefer them over CDs under the current interest environment.
Dividends > your videos
What does this even mean?