I recently got an email saying that my Vanguard prime money market fund’s expense ratio had increased from 0.16% to 0.17%. Not such a big deal because even with the higher expense ratio, Vanguard’s prime money market fund fees are still amongst the lowest in the industry. But what caught my attention when I went to review the account was that the SEC yield on the money market account has dropped to 0.01%, so technically I am losing or paying Vanguard 0.16% to park my money there. I also saw this discrepancy with Fidelity and T.Rowe Price, the other big provider of ultra-safe money market funds, which had similar fees and returns. Clearly I need to rectify this situation and find a better place to park my emergency/liquid savings.
Go for the High Yield Savings Account Instead
I know money market accounts are primarily used to safely park money because they never “break-the-buck,” but the fact that the expense ratio is greater than the yield (return) distorts this hypothesis. It would actually be much more cost effective to park my money in a higher yield savings account that have no expense or account fees. For example, Capital One’s 360 savings account currently has a 0.75% APY (annual percentage yield) that is essentially 75 times what you can get with a money market fund. And thanks to the FDIC insurance on these accounts the money is as safe or even more so than it is with a money market account.
I already have the above high yield savings account and have completed the transaction to move the funds out of my money market account prior to writing this article. It only took a couple of days since I have to go through my Wells Fargo checking account which links to both accounts. But opening a new high yield account (see this list for a few good options) doesn’t take long and within a few days you can actually start making, rather than losing, money on the most liquid of your cash savings.