For years, money market mutual funds have paid practically nothing. But each time the Federal Reserve lifts short-term interest rates, yields on money market funds tend to rise in tandem. “That’s one of their most attractive qualities,” says Peter Crane, president of Crane Data, a money fund research company. Many money funds yield more than 1%, and Crane expects yields on some funds to surpass 2% this summer. Rates on savings accounts from banks have also been increasing but have not kept pace with Fed rate hikes.
Money market funds invest in high-quality, short-term securities, such as Treasury bills, commercial paper and certificates of deposit. Although they carry little risk, they are not protected from losses by the Federal Deposit Insurance Corp. Cash that must be in a safe place, such as an emergency fund, is best stashed in an FDIC-insured bank account. Money funds provide a convenient holding place for cash in, say, a linked brokerage account.
You are more likely to get a higher payout if you invest in a money fund with low expenses. Vanguard Prime Money Market Investor (VMMXX) yielding 1.6%, has an expense ratio of 0.16%. Taxable money funds generally offer higher yields than tax-free municipal money funds. But if you’re in one of the top federal income tax brackets and live in a state with high income taxes, you may come out ahead with a tax-free fund. Look at the taxable-equivalent yield - the yield you’d need to earn on a comparable taxable fund after paying taxes to match the yield of the tax-free fund. For example, Vanguard Municipal Money Market (VMSXX) yields 1.10%, which is a taxable-equivalent yield of 1.75% for an investor in the 37% federal tax bracket.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
-
What to Expect From Bitcoin and Other Cryptocurrencies in 2025With help from Donald Trump, the cryptocurrency industry is expanding rapidly. Here's what to expect from bitcoin in 2025.
-
What's the Key to a Happy Retirement for a Couple?Retired couples spend lots of time together. Without the distractions of work and raising kids, miscommunication can cause trouble. Here's a way to avoid that.
-
Fed Sees Fewer Rate Cuts in 2025: What the Experts Are SayingFederal Reserve The Federal Reserve cut interest rates as expected, but the future path of borrowing costs became more opaque.
-
CPI Report Casts Doubt on Rate Cuts in 2025: What the Experts Are Saying About InflationCPI November Consumer Price Index data sealed the deal for a December rate cut, but the outlook for next year is less certain.
-
Rebound in Jobs Growth Keeps Fed on Track: What the Experts Are SayingJobs Report No nasty surprises in the November payrolls data leaves a quarter-point cut in play.
-
October CPI Report Hits the Mark: What the Experts Are Saying About Inflation
CPI While the current pace of rising prices appears to have leveled off, the expected path of rate cuts has become less certain.
-
Fed Cuts Rates Again: What the Experts Are Saying
Federal Reserve The central bank continued to ease, but a new administration in Washington clouds the outlook for future policy moves.
-
457 Plan Contribution Limits for 2025Retirement plans There are higher 457 plan contribution limits for state and local government workers in 2025 than in 2024.
-
Market Reaction to Election Results: What the Experts Are SayingJobs Report Election uncertainty has been removed from the list of investors' worries, helping equities soar.
-
Jobs Growth Stalls Amid Hurricanes and Strikes: What the Experts Are SayingJobs Report A dismal October payrolls print supports the case for a slow and steady pace of rate cuts.
