Thread by @money_cruncher

Vanguard Money Market Fund pays 4.22% interest on your cash savings with state tax savings.

But 99% of people don't understand the risk or how they work.

Here's an in depth thread on MMFs:

Money Market Funds are mutual funds that try to keep their share price at $1.

The funds investment money in short term, low risk products like treasuries, bonds, and various governement obligations.

For example, Vanguard has a $VMFXX that pays 4.22% annual yield, which is higher than most HYSA (Ally, Capital One, etc)

The fund is comprised of:

→ 40% of repurchase agreements
→ 33.8% of U.S. Govt. Obligations
→ 26.20% of U.S. Treasury Bills

Different custodians have their own versions of MMFs, and different types of MMF (i.e. Federal, Treasury, Municipal, etc)
For example:

> Vanguard - $VMFXX, $VUSXX
> Fidelity - $FDLXX, $SPAXX
> Schwab - $SNSXX

And you can generally only buy them on their own platforms.

Another thing is that since the funds hold Treasury bills, a percentage of the interest you receive can be exempt from state taxes.

For example, $VUSXX was 100% exempt from state taxes, which can add a few basis points of after-tax yield.

Say you received $2,000 of interest from $VUSXX.

100% of this interest was not taxed at the state level, but still taxed at the federal level.

vs receiving $2,000 of interest from your HYSA, with 100% of it being taxed at both the state and federal levels.

But MMFs aren't identical to a HYSA. They aren't FDIC insured.

So, it's important to weigh the risks and figure out what YOU are comfortable with.

The biggest risk is if the share price drops below $1. This would obviously never happen with a HYSA.

For example, during 08-09 there was a MMF called "Reserve Primary Fund"

At its peak it held more than $60 billion in assets, but during the financial crisis, it lost the dollar value and "broke the buck"

The fund dissolved in Dec 2015, having paid investors $0.991 per share.

In 2023, the SEC adopted MMF reform that increased minimum liquidity requirements for MMFs to provide a substantial buffer in the event of redemptions.

MMF shares held at a brokerage are also protected under SIPC, if a brokerage fails.

Overall, you have to determine where your comfort level is.

Vanguard's MMF fund ($VMFXX) has $359 billion of net assets or $VUSXX has $95 billion.

I'm personally comfortable with the risk but you have to analyze your own situation.

If you've found this post insightful, please help spread this message by:

1. reposting the first post
2. sending this post to a friend or family
3. following me @money_cruncher for more personal finance tips