Best place to place cash given low yields of MM funds?

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goshenBogle
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Joined: Thu Oct 06, 2011 6:12 pm

Best place to place cash given low yields of MM funds?

Post by goshenBogle »

The yields of MM funds are so low they are effectively zero. We currently have money in Vanguard Prime MM. But with the change that Vanguard is making to the Prime, we are questioning why have any money in a MM fund. Why do we need the MM fund? We have a checking account with enough cash to pay bills for the next 45 days or so. But we want a place for additional cash for emergencies, unexpected bills, taxes, etc.

What about this strategy? Elimianate the use of a MM fund, have checking account for upcoming bills, place cash in a bond fund, and sell shares of the bond fund when additional cash is needed. Granted we may have to pay tax on capital gains, but this approach would still deliver better returns than keeping the additional cash in a MM fund. For bond funds, we could consider Vanguard funds such as IT Bond Index (VBILX), IT Investment Grade (VFICX), Total Bond Market Index (VBTLX), etc.....

What are the pros and cons of this strategy?
Retired and loving it!!!!
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msi
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Joined: Sun Feb 17, 2008 11:15 pm

Re: Best place to place cash given low yields of MM funds?

Post by msi »

goshenBogle wrote: Mon Aug 31, 2020 3:44 pm The yields of MM funds are so low they are effectively zero. We currently have money in Vanguard Prime MM. But with the change that Vanguard is making to the Prime, we are questioning why have any money in a MM fund. Why do we need the MM fund? We have a checking account with enough cash to pay bills for the next 45 days or so. But we want a place for additional cash for emergencies, unexpected bills, taxes, etc.

What about this strategy? Elimianate the use of a MM fund, have checking account for upcoming bills, place cash in a bond fund, and sell shares of the bond fund when additional cash is needed. Granted we may have to pay tax on capital gains, but this approach would still deliver better returns than keeping the additional cash in a MM fund. For bond funds, we could consider Vanguard funds such as IT Bond Index (VBILX), IT Investment Grade (VFICX), Total Bond Market Index (VBTLX), etc.....

What are the pros and cons of this strategy?
Use high yield savings to hold cash. Lots of choices https://www.depositaccounts.com

Then transfer to checking as needed.
sport
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Location: Cleveland, OH

Re: Best place to place cash given low yields of MM funds?

Post by sport »

One problem with using a bond fund for expenses is that each sale of fund shares is a taxable event. Each of these events must be documented when you file your income taxes. Using a HY savings account avoids this problem.
HawkeyePierce
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Re: Best place to place cash given low yields of MM funds?

Post by HawkeyePierce »

Option 3) Just accept low yields as the cost of insurance when it comes to an emergency fund.

I keep my emergency fund in no-penalty CDs at Ally. Currently they're still yielding >1% but I'm assuming that when they start to mature next year the new CDs will earn much less. In my mind, that's just the cost of my safety cushion.
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simplesimon
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Re: Best place to place cash given low yields of MM funds?

Post by simplesimon »

HawkeyePierce wrote: Mon Aug 31, 2020 5:54 pm Option 3) Just accept low yields as the cost of insurance when it comes to an emergency fund.

I keep my emergency fund in no-penalty CDs at Ally. Currently they're still yielding >1% but I'm assuming that when they start to mature next year the new CDs will earn much less. In my mind, that's just the cost of my safety cushion.
+1. To borrow a quote from another thread about cash - it's a bad investment but great insurance.
atdharris
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Re: Best place to place cash given low yields of MM funds?

Post by atdharris »

I ask myself this every day. My taxable account is large enough where I could live off of it for 3-4 years, so I have often thought about simply putting my "emergency fund" into a bond fund like BND and collecting the interest. But I have not yet taken that step, so right now, it's in a no penalty CD.
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CardinalRule
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Re: Best place to place cash given low yields of MM funds?

Post by CardinalRule »

msi wrote: Mon Aug 31, 2020 4:26 pm
Use high yield savings to hold cash. Lots of choices https://www.depositaccounts.com

Then transfer to checking as needed.
Just as an aside, I was scrolling through the list of HYSAs on your link and came across Fitness Bank, which requires a certain number of steps - literal steps, like 12,500 of them - to get the highest rate. That was a new one for me... :happy
Topic Author
goshenBogle
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Joined: Thu Oct 06, 2011 6:12 pm

Re: Best place to place cash given low yields of MM funds?

Post by goshenBogle »

Let me add this: We tried to open HYS account at 3 online banks. Did not work. All 3 wanted to verify our phone number (we gave them landline & cell) so that they could verify that our name was linked to the phone number. They were unable to do so even though our phone companies told us that they did register our phones with our names. Without verifying phone number, the only way to do business with the online bank was through overnight mail. We found this process unacceptable & therefore did not open account at an online bank.
Retired and loving it!!!!
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