Understanding money market risk vs using online high yield savings account

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Joined: Wed Oct 10, 2018 10:21 am

Understanding money market risk vs using online high yield savings account

Post by RobZ » Wed Oct 10, 2018 11:10 am

As a 38 year old, in the last year I have began actively learning about personal finance. Prior to 2018, I did not have much of a long term plan with money beyond saving the max I could in my 401k/TSP. I am now learning some of the basics and sites like this have been very helpful. My question below is about the risk of money market funds vs high yield online savings accounts.

Income: $150k/yr + $22k rental income
Emergency funds: Yes, included in my savings
Savings: $75k
$170k mortgage @ 3.5%, 28 years outstanding
$60k car loan @ 2.5%, 4 years outstanding
Tax Filing Status: single
Tax Rate: TBD
State of Residence: FL
Age: 38
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 30% of stocks

Current retirement assets
TSP: $300k, 30% C-fund, 20% S-fund, 20% I-fund, 20% G-fund
Backdoor Roth @ Fidelity: $5.5k, mix of FZROX and precious metals ETFs
Total of All Accounts Together: 305k

Retirement New annual Contributions
TSP: $18.5k + $7.k match, 40% C-fund, 30% S-fund, 30% I-fund

Non-retirement savings/Investments
Taxable: $3k in FZROX
High Yield Discover Savings Account: $75k @ 1.85%
Real estate equity: ~$80k ($170k mortgage, property value is ~$250k).
* property is rented to tenants, giving me about a 5% annual return


I am currently saving $2k/mo and have been putting that into Discover at (1.85% APY). My purpose with this money is to continue to save and buy a house with cash in 3 years to be my long term home. I expect to save $6k/mo for the latter half of the next 3 years. I currently rent and my former home is a rental property due to a job transfer.

My basic question today is what are the risks of moving my $75k balance from a high yield online savings account (Discover Savings, 1.85% APY) to a Fidelity money market? Is there a risk of loss of principal? I assume that Fidelity's money market options will yield at least as much as the savings account, and reflect rising interest rates faster than Discover, although I don't know if that is a valid assumption? Also, don't money market funds have expense ratios while a Discover account would not (perhaps thats already priced into the Discover yield)? Also, I am considering keeping that $75k in savings/MM, but putting the new monthly $2k savings contributions into a taxable account in index funds, etc, to get some market exposure going forward.

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Tyler Aspect
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Location: California

Re: Understanding money market risk vs using online high yield savings account

Post by Tyler Aspect » Wed Oct 10, 2018 4:33 pm

Welcome to Bogleheads.

Money market mutual funds are similar to high yield savings account. The market yield bounces around so that the offered yield varies. Usually Vanguard's money market fund offerings have better yields compared to the equivalent Fidelity offerings.

Savings money for a house down payment usually suffers from a low rate of return. This is especially true when you already owns one house that you are not living in. Some of us Bogleheads are wary of excessive house savings leading to a situation that we call "house poor".

5% return in a rental property gets added to the current year income and tax. Where as most of stock return in a taxable account is unrealized capital gains that could be tax deferred for many years.
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Living Free
Posts: 281
Joined: Thu Jul 19, 2018 7:31 pm

Re: Understanding money market risk vs using online high yield savings account

Post by Living Free » Wed Oct 10, 2018 9:03 pm

At this present time you will get a better return paying down that car loan than with money in a money market or high yield savings account. Those accounts yield around 2% then you have to pay tax on it. You will get guaranteed 2.5% return on the car loan. I am biased though in that I am opposed to car loans in general.

Why do you want to pay for a house with cash? I''m glad to hear that you'd be maxing out your retirement accounts while planning for this though.

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