The best low-risk and no-risk places for your money
Emergency fund and other savings.
In the first part of this post, we discussed the role of your emergency fund, and how to decide on the right amount of emergency savings for your personal situation. One question remains, and it’s a great opportunity to cover investments with minimal risk.
Where should you keep savings?
Interest earned on your emergency fund won’t be life-changing money. But some people keep tens of thousands of dollars in savings — not just for an emergency fund, but for other goals as well — so the location can make a real difference in the long run.
The obvious location is a savings account. There are major banks like Capital One with competitive rates. It’s totally fine to keep it simple and stop there, but we’ll discuss why a savings account isn’t the most profitable location for risk-free saving.
The main alternative is to buy a fund in your brokerage account that holds essentially risk-free investments. Let’s talk about money market funds.
Money market funds are mutual funds with the unique characteristic of always being priced at $1 per share. You buy them through a brokerage account like any other investment. They hold short-term, high-quality debt instruments that allow them to pay dividends while incurring minimal risk. The dividends pay out like savings accounts, with a monthly dividend based on the amount invested each day in the past month. But they have higher yields than virtually all savings accounts. Like savings accounts, money market funds (MMFs) are a cash equivalent asset: they’re extremely liquid and low-risk.
There are three broad types of MMFs: prime, municipal, and government. We’ll list examples of each type in a moment. Government MMFs are not just the safest category of these three, but are among the safest assets in the world. They invest only in short-term US government securities, some of which are exempt from state and local tax. Due to their tax benefits and safety, government MMFs are the best choice for most people.
However, not all federal debt instruments have tax exemptions.1 Most government MMFs hold a variety of government debt securities, only some of which are state tax-exempt. We’ll call these “broad government MMFs” to differentiate them from Treasury MMFs (or sometimes, “Treasury only”). Government MMFs that hold only Treasury bonds (and certain federal agency bonds) pay dividends that are 100% (or quite nearly 100%) exempt from state and local tax. You can see the percentage of state tax-exempt dividends from a fund in past years by checking the asset manager’s tax documents.2
US Treasury bonds are tax-exempt at the state and local levels, so they’re subject only to federal tax. Municipal bonds are issued by state or local jurisdictions, and they have even more tax benefits. Income from muni bonds is always tax-exempt at the federal level, and exempt at the state level if the bond is issued by your home state (or by a US territory like Puerto Rico). Muni bonds have relatively low yields due to their tax benefits. That makes them most valuable to those with high income, because reducing tax is more important for those who pay a higher marginal tax rate.
Holding a home state muni MMF would allow you to pay no tax on the dividends. The drawback is that these funds expose you to the credit risk of a single state. The most common states for muni MMFs are New York and California, because they’re populous states with relatively high income tax rates and a lot of high-earning residents.
Alternatively, there are national muni funds that hold diversified portfolios of muni bonds. Their dividends are exempt from federal tax, but you would owe state tax — unless, of course, you live in a state with no tax on income or interest and dividends. You don’t need to be a high earner to consider these. Depending on current market conditions, many people with middle incomes might find that national muni MMFs have a higher after-tax yield than government MMFs, making them a reasonable option.
Although all MMFs are conservative investments that almost never lose value, municipal bonds carry higher credit risk than government bonds.
Prime MMFs are general-purpose and can hold a wide variety of instruments, including short-term corporate debt. They tend to have the highest yields before tax. It’s hard to think of an individual to whom I could strongly recommend one. Prime MMFs don’t have the tax advantages or paramount safety of government MMFs, and their yield is not much higher. Vanguard seems to agree, since they decided to stop offering a prime MMF. The only significant case of “breaking the buck” in US history, in which a money market fund’s share price fell below $1, was a prime MMF in September 2008. You can read about the details in this footnote if you’re interested.3
As we covered in the intro to investing, different mutual funds are available at each brokerage firm. This applies equally to money market mutual funds. Some examples from Schwab, Fidelity, and Vanguard are:
As you can see, MMF tickers always end with XX.
Vanguard MMFs have the lowest expense ratio in each category. They’re available in a Vanguard brokerage account, of course, as well as E*Trade and JPMorgan brokerage accounts. Like many Vanguard mutual funds, their MMFs have a minimum initial investment of $3,000 (after which you can add any amount). There’s one exception: you can hold one of their broad government MMFs by transferring cash into a Vanguard brokerage account. That cash will be automatically swept into VMFXX, regardless of the amount.
The Schwab and Fidelity MMFs above have no minimum initial investment.4
Personally I hold my savings in SGOV, which is an ETF that walks and quacks like a Treasury money market fund. It’s not a mutual fund, so naturally it doesn’t count as a money market mutual fund, but it’s as safe as the safest money market funds. Its dividends are nearly 100% exempt from state tax. Because its expense ratio is so low, SGOV has a higher pre-tax yield than most of the mutual funds mentioned above. And because it’s an ETF, it’s available in any brokerage account. VUSXX has similar merits, but it’s not available everywhere. Vanguard recently launched VBIL, which is similar to SGOV but with a slightly lower expense ratio. As an ETF, it naturally has no minimum initial investment.
Should you save with a money market fund?
How do we compare all these options? We can’t precisely quantify risk, but we can easily compare the performance of each option before and after tax. Before tax, you can directly compare the APY of a savings account, the 7-day yield of a money market fund, and the SEC yield of SGOV and similar ETFs like VBIL. You can find the 7-day yield or SEC yield on each fund’s webpage; I linked to several of them in the list above.
Savings accounts have interest rates that are nearly always lower than money market fund yields, before tax. Because savings account interest has no tax exemptions, the gap widens after tax. To calculate the effect of tax on the return from your savings account, you can subtract the sum of your federal and state marginal income tax rates. Let’s say your savings account APY is 4%, and your marginal rates are 22% for federal tax and 8% for state tax. Your total marginal tax rate is 30% (or .3). Your after-tax interest rate would be .04*(1-.3) = .028, or 2.8%.
You can do the same with MMFs, but you would reduce or eliminate each tax rate depending on its tax exemptions. If you bought VUSXX, for instance, you’d subtract only your federal tax rate from the yield, because the dividends are fully exempt from state tax.
For the sake of continuing, let’s accept the assumption that MMFs have higher after-tax yield than savings accounts, and that if we don’t want to accept any risk, we can hold a government MMF.5
All things considered, does it make sense to use a MMF instead of a savings account? Let’s consider effort and psychology.
There are very low-effort ways to use a money market fund. Once you transfer any cash into a Fidelity or Vanguard brokerage account, it’s automatically swept into a government MMF. It may not be optimized for your tax situation, but it’s already better than a savings account. You can transfer the money out of your brokerage account with no delay from selling securities.
And what if you want to optimize? That’s easy too: you can set up automatic transfers from your checking account to your brokerage account, and automatic purchases of whatever fund you’d like to buy. We have a whole post on how great automation is for your investing habits and mentality.
So once you have automatic transfers set up, saving with a MMF or a savings account would both be close to effortless.
From a psychological perspective, some people save much better when their money is transferred out of sight. If it’s visible, they’re tempted to spend it. Someone like that would benefit greatly by keeping their savings in their brokerage account, and not checking it often. You could even have a brokerage account used exclusively for saving.
But some people take great comfort in seeing a big savings balance when they log into their bank account. If you find that rewarding and it might motivate you to save more, that’s a point in favor of keeping the money at your bank.
You could potentially use a brokerage account at your bank, to invest in a MMF and keep your savings in the same view as your checking account. The brokerage products at banks like Chase and Bank of America often have odd restrictions that are meant to push you toward using their advisory services, but they’re good enough to use as a savings account substitute. And as we mentioned above, a JPMorgan brokerage account (associated with Chase bank) provides access to Vanguard mutual funds.
Wherever you hold your savings, it helps to have a clear goal for each portion — emergency fund, Hermès bag, vacation to Froggyland, your next car, a nice gift for your friend, a down payment on a home. If you don’t assign your money a clear purpose, you’ll be more likely to spend it impulsively or quit saving.
Savings accounts make it easy to instantly transfer money to your checking account, if you use both products at the same bank. I don’t think this should be a deciding factor for most people, as long as they have access to a credit card. You can spend on a credit card and transfer money from your brokerage account to pay the bill later. There’s no practical need to hold all your cash at the bank, ready to use instantly. However, I do think keeping some physical cash in your home is wise, mainly in case of an extended power outage.
So it’s up to you where to keep your savings. But armed with this knowledge, you can certainly avoid one terrible fate: the dreadful tedium of a yield chaser. This is a person who compulsively checks bankrate dot com for the highest savings account rates, and is willing to move their money between banks every month to improve their interest rate by 0.1%. If you meet someone who does this, please tell them about money market funds.
Further resources
Every Money IRL post is organized in The Omni-Post, and all vocab terms are here.
Fidelity has a detailed explainer on money market funds if you want to learn more.
The White Coat Investor has a good post on why municipal money market fund yields are so volatile. This can make it harder to make a long-term decision between a government or muni MMF.
If you aren’t familiar with some of the terms used above, like “expense ratio” and “marginal tax rate”, please check out the gentle intro to investing and the overview of tax basics.
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Repurchase agreements are not state tax-exempt. They aren’t a practically important instrument for the average investor to understand. But if you see them in a fund’s portfolio, you know its dividends aren’t 100% state tax-exempt. You can click the link to watch a video about them if you’re curious.
In 2024, SNVXX, SPAXX, and VMRXX had dividends that were 33%, 55%, and 64% state tax-exempt, respectively. For Treasury funds, those figures were 99.99% from SNSXX, 97.0% from FDLXX, 100% from VUSXX, and 97.5% (see column 17) from SGOV. When looking through these large spreadsheets, sometimes the best way to find a fund is by searching the CUSIP, which is a nine-character code that uniquely identifies North American securities.
Money market funds don’t have a perfect record of protecting the principal investment. The only major failure was when the Reserve Primary Fund “broke the buck” during the 2008 financial crisis. Lehman Brothers was a prominent bank whose bankruptcy became the largest in US history. The Reserve Primary Fund’s loss was due to exposing the fund to credit risk through $785M of commercial paper (very short-term debt) issued by Lehman. The fund eventually returned 99% of assets to investors, but the last 10% of distributions were so delayed that the effective loss was somewhat greater than 1%, because it deprived shareholders of the opportunity to keep investing that money. You can click the links in this paragraph to read more about it.
Fortunately, you don’t have to accept any credit risk in money market funds if you don't want to. You can buy a government MMF.
Schwab and Fidelity have other share classes with lower expense ratios and minimum initial investments. Schwab has another share class they call “ultra shares” with a $1M minimum initial investment. See SUTXX for an example. Fidelity has a “premium” share class with a $25K or $100K minimum initial investment — depending on the fund — and an “institutional” share class with a $1M or $10M minimum initial investment. See FZDXX and FSKXX as examples.
Even those share classes have higher expense ratios than the Vanguard MMFs available to anyone with $3,000. And if you don’t want to use a Vanguard or E*Trade account, you can buy ETFs like VBIL and SGOV in any brokerage account.
Some people would question whether US Treasury bonds are as safe as a savings account. Both of them rely on the credit of the federal US government. Treasury bonds are safe because the United States is the cornerstone of the most stable and powerful alliance in human history, and the US has the most liquid and mature capital markets in the world. Bank accounts are safe because people trust FDIC insurance, which is funded by FDIC member banks, but is ultimately controlled and backstopped by the federal government. A huge portion of assets that US banks hold are government bonds — over $4 trillion of them. Banks can’t continue meeting their obligations without payments from those bonds. If the US were to default on its debt, nearly every financial asset would be in deep trouble. Widespread bank runs would become a real threat. Unfortunately, that risk is growing.