Fed Predicts Lower Rates in 2024: Lock In These Yields While You Can

A money market account is a versatile tool that can tackle multiple financial needs. But while you could dump all of your available cash into one of these accounts and call it a day, that doesn’t necessarily mean you should. Depending on your financial goals, one or more money market alternatives might be a better fit for you. Money market accounts keep your cash liquid while earning more than your basic savings account. However, quite a few cash alternatives can earn you even more—in some cases, by a significant stretch. Let me walk you through a number of money market alternatives. As you’re looking through these, you’ll want to consider a few things—how liquid the accounts are, how risky they are, and how diversified you want to be with your investments and cash holdings. Don’t worry; we have all of that information, and more, explained for the money market account alternatives below. You worked hard for your money, so you should make sure to store it somewhere advantageous.

What Is a Money Market Account?

---

Money market deposit accounts (better known to you and me as money market accounts) borrow features from both checking and savings accounts. Like a checking account, users typically have check writing privileges, receive a debit card, or both. However, the number of monthly transactions is usually limited, with six per month being the most common. However, like a savings account, these interests typically generate interest—and in fact, they usually produce a better yield than traditional savings accounts. Like savings accounts, however, the interest rates are variable, so a high rate now might not be a high rate forever. (Conversely, a low rate now might rise in the future.) A money market deposit account is a popular place to store an emergency fund because the account will earn interest while still providing relatively easy (albeit limited) access to your money. Funds in these accounts are insured by the Federal Deposit Insurance Corporation (FDIC) for banks, or the National Credit Union Administration (NCUA) for credit unions, up to $250,000. Note that, despite a similar name, a money market account is different from a money market mutual fund. (But don’t worry: I’ll explain what a money market mutual fund is in a minute.)

Why Consider Money Market Account Alternatives?

---

While there are several advantages to money market deposit accounts—such as higher interest rates than traditional bank savings accounts, and relatively high liquidity—these accounts have their disadvantages, too. Many (though not all) money market accounts have high minimum balance requirements and might also charge monthly fees. Additionally, since the interest rates are variable, it can be challenging to predict exactly how much you will earn. Also, some money market alternatives can earn you more money.

1. High-Yield Savings Accounts

---

High-yield savings accounts (HYSAs) are an excellent short-term investment. These accounts offer much higher rates than traditional savings accounts but usually have similarly high liquidity as cash deposits. One downside of an HYSA is that interest rates can change. Know that even if you get the best interest-rate deal possible initially, that rate might drop over time. For example, many different banks lowered their high-yield savings account interest rates numerous times throughout 2020. This happens because interest rates are tied to the Federal Reserve’s fed funds rate, which goes up and down over time depending on the Fed’s views of the economy. So it’s essential to keep an eye on a bank’s rates not only when you open the account, but over time as long as you have an account with the bank. Also keep an eye on fees. Some banks will charge a monthly maintenance fee for high-yield savings accounts, or charge other fees for using certain bank account features. So understand all of the fees associated with your chosen account before signing up. Ultimately, high-yield savings accounts are a great cash alternative that can earn you a higher rate of return than a traditional savings account without sacrificing liquidity. They’re also extremely low-risk—the money in your account can’t decline in value, and each depositor is typically given up to $250,000 in Federal Deposit Insurance Corporation (FDIC) insurance or National Credit Union Administration (NCUA) insurance.

Save with Step Banking

---

Step, made popular by its unique “hybrid” Step Visa Card, has expanded its offerings to include a powerful high-yield savings tool. Users earn 5% annually—compounded and paid monthly—on up to $250,000 saved in their Savings Goals, calculated using the average daily balance in your Savings Goals. Like with your average savings account, Step’s savings yield can change depending on movements in the Federal Funds Rate, but if that happens, Step will give you 30 days’ notice before it happens. To qualify, the user must have a direct deposit of at least $500 per month, and the benefit extends for as long as the direct deposits continue. (Other perks of making qualifying direct deposits? Bonus points on dining, food delivery, charitable donations, specific merchants—and you can get paid up to two days early.) And remember: When you sign up with Step, you also get their Step Visa Card—a spending card that functions like a debit card, but also boasts some of the features of a Visa credit card—including the ability to build your (or your child’s) credit history. You can’t spend money you don’t have, eliminating the fear of overdrafting. The card can be used to withdraw money fee-free at more than 30,000 ATMs, and it’s protected by Visa’s Fraud Protection and Zero Liability guarantee. Sign up for high-yield savings with Step today.

2. Certificates of Deposit

---

Certificates of deposit (CDs) are offered by most banks and credit unions and are easy to open and understand. CDs are almost risk-free and insured in the United States for up to $250,000. They are another savings instrument like savings accounts but come with longer-term commitments, varying from three months to five years. CDs work by lending money to a bank for a set amount of time (the “term length”), with longer term lengths typically involving higher interest rates. Much like any interest-bearing asset, the longer the term length or commitment, the higher interest rate and return you can expect to earn in exchange for losing access to your money for longer. During the term length, you gain interest on the principal at a rate usually higher than that of a high-yield savings account. If you take money out during the term length, you’ll have to pay a penalty, so it isn’t wise to invest money you anticipate needing in the near future. Certificates of deposit are a great example of the give-and-take involved with choosing a cash equivalent. CDs are decidedly less liquid than a savings account—your money will be wrapped up for a set amount of time, though in emergencies, you can still access it by paying an early withdrawal penalty—but they offer higher rates than basic and even high-yield savings accounts.

3. Money Market Funds

---

Not to be confused with money market accounts, money market funds (or money market mutual funds) are open-ended mutual funds that invest in debt securities with short maturities. This is considered a low-risk investment with very low volatility. Investors receive steady interest income from money market mutual funds. Depending on the types of securities in the fund, the income generated is either taxable or tax-exempt. There are several different types of money market funds, including: – Treasury (only holds Treasury securities) – Government (holds Treasury and other agency securities) – Prime (holds many types of debt security) – Municipal (holds municipal debt securities) Money market funds are more liquid than CDs and offer comparable (and sometimes higher) yields. However, money market funds—and any cash alternative you’d own inside of an investment account—is going to be less liquid compared to, say, a checking or savings account. That’s just because of the additional steps and waiting time involved. You have to sell the asset, wait for the transaction to settle, either wait for a check from the broker or have the money transferred to a related bank account, then withdraw the money. (And depending on the type of investment account, you might also have to worry about tax implications, withdrawal penalties, and other limitations.) Because money-market funds invest in extremely short-term, extremely high-quality debt, they’re considered one of the safest investments on the planet. However, a few have failed on rare occasions (for instance, during the Great Recession). So any money up to the FDIC/NCUA limit is technically safer in a money market account. But money market funds remain an extremely safe place to earn some extra money on your money. Many brokerage accounts will actually sweep idle cash into their money market funds so you’re still earning interest even if you don’t have all of your funds invested. Plynk, for instance, is an easy-to-use brokerage app that lets you invest in stocks, ETFs, mutual funds, and cryptocurrency, starting for as little as $1. Plynk auto-invests idle cash into the Fidelity Government Money Market Fund (SPAXX), which holds U.S. Treasury and other government debt—investments that are considered very safe compared to other debt securities.

4. Treasury Bills

---

Much like any other individual or business, the U.S. government can borrow money to make ends meet. It does so through the U.S. Treasury, which issues three primary kinds of debt: – Treasury bonds (T-bonds): Mature in 20 to 30 years – Treasury notes (T-notes): Mature in two to 10 years – Treasury bills (T-bills): Mature in 4 to 52 weeks Treasury bills—which can have maturities of four, eight, 13, 17, 26, and 52 weeks—are sold in increments of $100 (also the minimum purchase amount) up to a value of $10 million. You can typically purchase these through the U.S. government’s Treasury Direct or through a bank or broker. When you buy a T-bill, you lend money to the U.S. government for a specified period of time. The price for a T-bill will vary, but usually will be below the bond’s face value, or “par value.” (For instance, a $1,000 T-bill might cost $975 to purchase.) When the T-bill matures, you receive the full par value of the bond—so the return on your investment is the difference between the discounted price you paid at auction and the par value of the T-bill. Treasuries are one of the most secure investments in the world due to their virtually guaranteed repayment. The federal government hasn’t defaulted on a debt payment since moving away from the gold standard in 1971. When you receive the repayment of your T-bills’ face value, the income generated is exempt from state and local taxes. This can make them a good choice for investors looking for reliable, tax-advantaged income. T-bills are very liquid securities that generate a modest amount of income. Many people hold them in exchange-traded funds (ETFs) and mutual funds, though some financial institutions and fintech firms allow you to own them individually, or invest in them through Treasury products.

Invest in T-bills with Public.com

---

Public.com—an investing platform that allows you to invest in stocks, ETFs, cryptocurrency, and alternative investments—has launched a product that allows you to invest in Treasury bills. This investing product allows you to enjoy a higher yield than even the most competitive rates on a high-yield savings account—with equal accessibility to your cash. That is, you can tap your balance anytime; you don’t have to wait for your T-bill holdings to mature. To participate, you’ll need to open an account with Public.com and make a deposit of as little as $100. The Treasury product is offered through Public by Jiko Securities, Inc., a registered broker-dealer, member FINRA and SIPC. In exchange for the management, trading, and custody of Treasury services, Jiko charges a flat management fee of 5 basis points (0.05%) per month, or 60 basis points per year, based on the average daily balance of your Treasury account. Public deducts this amount from your Treasury account each month and receives a portion of that management fee as a referral fee. However, even factoring in this fee, Public.com‘s Treasury Account provides easy access to a safe investment that generally yields more than a high-yield savings account and is exempt from state and local income taxes.

5. Treasury Notes

---

As mentioned above, Treasury notes are considered between short- and medium-term in nature, taking more time to mature (two to 10 years) than T-bills. Like with T-bills, T-notes are backed by the full faith and credit of the U.S. government, making them very low-risk investments. They’re sold at terms of two, three, five, seven, and 10 years. Treasury notes pay a fixed interest rate every six months until the note matures. Federal taxes on interest earned are due each year, though the income is exempt from state and local taxes. With T-notes and other bonds, you can either hold on until it matures, at which point your full principal will be repaid. But you can also sell the bond—which you’ll hopefully do for a gain, but you might have to sell at a loss. Either way, if you want to know how bonds move higher and lower, take a breath and brace yourself—it’s a mouthful: Bonds’ performance is directly tied to market interest rates. Specifically, bonds have an “inverse relationship” with interest rates—when market interest rates rise, bond prices fall, and when rates fall, bond prices rise. Thus, all bonds have some level of “interest-rate risk,” and T-notes have more of it than T-bills. Why? If market interest rates rise, new bonds with higher rates will make comparable older bonds with lower rates look less enticing to investors. As a result, the market will price those older bonds lower. This effect is amplified on longer-dated bonds because they have more interest payments remaining. Put differently: If a bond you hold matures in four weeks, you probably won’t sell it early just because a new short-term bond with higher rates is available. But if your bond matures in, say, five years, you might sell your current bond to buy a bond with higher income potential. The flip side of this risk? T-notes usually offer higher rates than T-bills. They’re also similarly liquid—yes, they take longer to mature, but you can usually buy and sell them with ease.

6. Short-Term Corporate Bonds

---

Just like the U.S. government issues bonds to help fund its operations, corporations frequently issue bonds to fund research, development, expansion, you name it. Generally speaking, corporate bonds have lower credit quality than U.S. Treasury bonds. Credit quality is generally determined by how likely an entity is to pay back its debts—and the credit-ratings agencies believe that just about any U.S. corporation has at least a little (if not a lot) more risk of going under than the U.S. government. Probably a fair bet. That lower quality does mean more risk—but it also usually means better compensation in the form of higher yields. Also, “lower quality than Treasuries” doesn’t always mean “low quality.” Many corporate bonds are considered investment-grade, which means the bond rating companies generally deem them likely to be repaid. If you’re willing to accept more risk, you can invest in junk bonds, which are less likely to be repaid but also offer even sweeter yields as a result. Like with U.S. Treasury bonds, short-term corporate bonds are fairly liquid—they don’t take long to expire, and if you need cash before that, you can typically sell without trouble. And like with T-notes and T-bills, many investors buy these through ETFs and mutual funds rather than individually.

7. Short-Term Bond Funds

---

Like I’ve been saying for the past few sections, you can buy T-bills, T-notes, TIPS, and corporate bonds through short-term bond funds, be they mutual funds, ETFs, or closed-end funds (CEFs). When you purchase shares of a bond fund, your money is pooled with other investors’ money, which is collectively invested in debt securities. Which securities the fund invests in is determined by either a human manager(s) or a rules-based index, but either way, there are typically at least some guidelines governing what the fund can and can’t purchase. The fund distributes income regularly to investors, who also enjoy any price gains (or absorb any price losses) from the shares over time. In exchange, you pay at least one fee—annual expenses that are automatically taken out of the fund’s performance. (Mutual funds also might charge other fees, such as sales loads that are taken out of your initial investment.) Short-term bond funds are generally considered low-risk investments not just because of what they invest in, but how much they invest in. If you only invest in a few individual bonds, the failure of a single bond could have a significant pull on your nest egg. But bond funds invest in hundreds if not thousands of debt securities, so the failure of one or two won’t affect the portfolio much. Also, risk is relative—a junk bond fund might be less risky than owning one or two junk bonds, but it’s still much riskier than owning investment-grade corporate bonds or Treasuries. These funds are also great cash alternatives because it’s fairly easy to buy and sell shares without affecting their price.

Should You Consider an Alternative to Money Market Accounts?

---

A money market account might be a great fit for you, or it might not be as strong of a choice as some of its alternatives. It all depends on your goals. For example, if you keep substantial emergency funds in regular savings accounts, you’ll almost certainly want to transfer at least some of those funds to money market accounts, where you can earn more on your balance. Conversely, if your goal is to earn as much money as possible, you might be better off with high-yield savings accounts or certain bonds and bond funds. Other reasons to switch out of a money market account include not having enough access to your money (if it caps you at a certain number of withdrawals, and you’re very active with your account) or high monthly fees you can avoid by banking elsewhere.

Money Market Accounts: FAQs

---

Are money market accounts federally insured by the FDIC? Money market accounts are insured by the bank or credit union you open the account through up to $250,000. If you use a bank, your money is insured by the Federal Deposit Insurance Corporation (FDIC). If you use a credit union, your money is insured by the National Credit Union Administration (NCUA) up to the same amount. Can money market accounts lose money? A money market account is considered a safe investment, but there are a few indirect ways you could lose money. If your account charges monthly fees and those exceed the amount of interest you are earning, you’re losing money. Similarly, if you are charged a penalty for not maintaining a minimum balance or exceeding the maximum number of transactions per month, you might lose more money than you gain. Also, if your bank goes under and the money you have deposited exceeds the $250,000 FDIC/NCUA insurance threshold, you likely would lose any money over that number. Fortunately, many of the best money market accounts have no fees or minimum balance requirements. And if you’re lucky enough to be banking with that much money, you can easily avoid the $250,000 FDIC/NCUA insurance scenario outlined above by spreading your money across multiple banks. Do money market accounts have competitive interest rates? Money market accounts have competitive interest rates compared to traditional bank savings accounts. However, the interest rates aren’t as high as many money market account alternatives. Who offers money market accounts? Money market accounts are offered by banks, credit unions, and many online financial institutions.