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Time to Rethink Brokerage Money Market Accounts

Some are now paying pretty decent interest rates

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Some brokerage money market accounts are paying decent interest rates now.

En español | For many years, I’ve told people they could earn hundreds or even thousands of dollars for an hour of their time. It’s still true, but now there are more good options for stashing your cash.

The good news: While bank savings accounts and brokerage money market accounts have been paying about 0.01 percent annually for quite some time, rates have begun to rise. The average bank savings rate has risen severalfold over the past couple of years. The bad news: It’s still paltry — 0.09 percent. (With the power of compounding, your money could double in a mere 771 years.) 

Let’s take a look at two options for higher earnings without additional risk.

The old tried-and-true way

I’ve long been a proponent of not settling for average returns and have recommended finding banks and credit unions backed by agencies of the U.S. government, such as the Federal Deposit Insurance Corporation and the National Credit Union Administration. Internet-based banks tend to offer the best rates. Two sources I often use to find the best rates are DepositAccounts.com and Bankrate.com. A recent search turned up — voila! — a few banks paying 1.75 percent annual percentage yield (APY) or more while keeping your money safe and liquid. Every $10,000 earns $175 annually before taxes. So why keep that money in your checking account, earning nothing? 

The new way

Now there’s a new option — a mutual fund money market fund. For many years, I’ve recommended minimizing cash in brokerage money market accounts, which have been typically paying a 0.01 percent APY. With the Federal Reserve pushing up short-term rates, I’ve now changed my tune. According to iMoneynet, the average taxable money fund yields 1.09 percent, which is a heck of an increase from the 0.00 percent APY paid between 2010 and 2015.

But don’t settle for average. Vanguard’s Prime Money Market Fund was yielding 1.86 percent annually as of May 3. It doesn’t primarily invest in securities backed by the U.S. government, however, so I don’t typically recommend this fund. That’s because the SEC adopted new money market mutual fund rules that allow any mutual fund family to impose redemption restrictions or to charge a fee to withdraw your money. 

Funds such as the Vanguard Federal Money Market and Vanguard Treasury Money Market yield 1.62 percent and 1.67 percent, respectively. A U.S. Treasury money market fund has an extra advantage, as the interest is exempt from state and local income taxes. While the Vanguard Treasury Money Market Fund requires a $50,000 minimum, it now pays as much as virtually any bank savings accounts, if you take into account the state-tax exemption. FidelitySchwab and other brokerage companies also offer competitive money market rates compared to high-yield bank savings accounts. Many financial firms, however, still restrict what money market accounts you can invest in and may still pay lower rates. The lower rate means extra profit for them — and a hidden fee for you.

My advice: Reward yourself with higher earnings

First, look to see if you have large amounts of cash earning less than 1percent annually. If you do, take a half-hour and make it work harder. Find a high-yield savings account or money market mutual fund that invests solely in securities backed by the U.S. government yielding 1.50 percent or more. If you are in a state with high income-tax rates, a Treasury money market fund may be superior. 

If you need some extra motivation, calculate how much more you would make with such a change, and then take a third of your extra earnings to reward yourself. If you have $10,000 in cash, this may mean only a modest dinner out, but it could pay for a new smartphone or even a fancy vacation if you have more money to invest. 

Allan Roth is the founder of Wealth Logic, an hourly-based financial planning firm in Colorado Springs, Colo. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and others. His contributions aren't meant to convey specific investment advice.

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