Most people take a simple view of cash: they have a checking account for spending and a savings account for savings, and if they get fancy, they’ll have a CD for longer term savings goals. Power users will change to an online bank with better returns, and that’s about as far as it goes. That certainly works, but we can do a lot better with few downsides and a lot of extra benefits.
I’d like to start with explaining how traditional banks work and then look at alternatives. Basically, banks make most of their money by lending it, either for mortgages, auto loans, credit cards, etc. Federal regulations require they keep a certain percentage of their assets in “cash,” so they pay interest on checking and savings accounts to attract deposits. The larger the bank, the less they need to work for deposits since they have brand recognition. That’s why you’ll see higher interest rates at online only banks (e.g. SoFi, Ally, etc) than at huge brick and mortar banks (Wells Fargo, Chase, etc), they need to pay more to attract customers since they don’t have branches to do so. However, they’ll never pay more than a certain percentage of loan rates, otherwise they’ll lose money. Switching banks is time consuming, so customers rarely do that, which means banks only need to have periodic promos to encourage people to move their money to them.
Let’s compare that to a brokerage. Brokerages offer a variety of features, and most of their money is made on commissions from trades (or for free brokerages, bid/ask spreads) or from fees on funds they run. The friction in changing funds is pretty low, so funds often compete for low fees to attract investors, and the more investors they have, the lower their fees can be (managing $1B isn’t that different from managing $10B in terms of costs). They sometimes offer loans (e.g. margin loans), but that isn’t the core of their business, and those loans are backed by the debtor’s own assets, not the brokerage’s funds, so risk is much lower and not related to deposits by other customers.
So now that the high level differences between banks and brokerages are out of the way, let’s look at products brokerages have and how they line up with traditional banking products:
- Money Market Funds - basically savings/checking accounts, but run by a fund manager instead of a bank; you can select from any number of money market funds, from funds that look to reduce taxes (e.g. buy mostly Treasuries) to funds that seek to maximize returns; interest is generally accrued daily and paid monthly; banks sometimes offer money market accounts, which are similar, but they operate a bit differently, and you only get the one they offer
- brokered CDs - similar to regular bank CDs, but you’re buying them on the open market instead of from your bank; these CDs cannot be broken early like bank CDs, but they can be sold on the market like any stock for the current fair market value; this means they can reduce in value if you sell before maturity, but since you’re able to shop for the best price, you usually get a much better return if you hold to maturity
- t-bills/notes/bonds - similar to brokered CDs, but issued by the federal government in increments of $1000; these are not subject to state and local taxes, and some brokerages allow them to be auto-rolled (when they mature, the same denomination will be purchased); there’s no early redemption, but they can be sold at any time for fair market value
- municipal bonds - buy bonds directly from cities and whatnot; these are usually not subject to state, local, or federal taxes, but also have higher risk due to cities generally being less credible debtors than state or federal governments; I don’t bother with these, but maybe they’re worthwhile in states with higher taxes (mine is <5%, so not that high)
Generally speaking, the brokerage options over a greater return than traditional banking products because it’s trivial for investors to switch products without changing brokerages.
Here’s what I do:
- checking/savings - invested at Fidelity in SPAXX, which currently yields ~5%, and I think it’s ~30% state tax exempt; if my state had higher taxes, I’d probably opt for a Treasury-only fund; switching takes like 30s to enter a trade; Ally Bank savings is 4.25% and money market fund is 4.4%, and I use my brokerage as checking, so I’m getting 5% on all money held there (Ally checking is 0.10%)
- CD - I had a no penalty CD @ 4.75% @ Ally, which was a fantastic rate when I got it; Fidelity offers non-callable CDs @ >5% for periods from 3 months to 5 years, and Ally only offers those rates for 6-18 months (and they’re still lower than Fidelity); I don’t buy any because I buy…
- Treasuries - no equivalent at banks, but they’re close enough to CDs; current rates are 5.2-5.4% depending on term (4 weeks to 52 weeks), and even notes (2-10 year terms) are 4.5-5%; my efund is invested in a t-bill ladder; I bought 13-week (3-month) t-bills every other week and set them to autofill, and my gains live in my money market fund (SPAXX @ 5%); this is half of my efund, with the other half in ibonds; if I need money, I either cancel the autoroll, or I sell the t-bill on the market
Here’s my list of pros:
- significantly higher interest in checking (5% vs ~0.10%); no difference between “checking” and “savings,” they’re all just brokerage accounts
- more options for investment - I now feel comfortable keeping my efund, checking, and regular savings in the same place without having to sacrifice returns
- debit card rocks - Fidelity and Schwab both have worldwide ATM fee reimbursement and low/no foreign transaction fees (Fidelity is 1%, Schwab is 0%)
- can have cash savings and investments in the same place - Fidelity also has my HSA, and I may eventually move my IRA as well
- paycheck comes a day earlier - lots of banks offer this, but often only on their checking accounts
And some cons:
- SIPC instead of FDIC insurance - coverage is about the same, but FDIC is automatic, whereas SIPC requires me to make a claim; I doubt I’ll ever need either
- a lot more options means the UI is a bit more complex; once familiar, it’s not an issue
- some services don’t play nice with brokerages - I keep an Ally account around just in case, and I honestly haven’t noticed any real issues (sometimes I can only link accounts one way, but that’s not an issue)
I switched from Ally to Fidelity last year for my primary bank and I’m loving it, and I highly recommend others give it a shot. If Fidelity isn’t your speed, Schwab works well too. Vanguard doesn’t offer a debit card, otherwise I’d recommend them as well (their money market funds are even better than Fidelity’s). I used to shop around for better savings rates, and now I don’t bother because Fidelity beats all of them on features and average returns (e.g. a better savings rate still loses if checking is near 0%).
Feel free to ask questions.
I used to do this but if you aren’t aware Regulation D was removed during the pandemic which means you can use savings accounts exactly like checking accounts. Some banks will also let you store nothing in checking and auto-draw from savings when you use your checking account.
I currently store my cash with SoFi which allows this and has 4.6% returns. I made the decision to stop using a brokerage as checking a while ago but IIRC, money market accounts and HYSA accounts moved together for returns and sometimes HYSAs were better so I felt like it wasn’t worth the complication for potentially a few dollars of profit per year. I store very little cash on hand anyway since I’m able to sell raw stocks in the event of an emergency. (Selling while the market is down will still put you ahead of cash returns if you invested that part of your emergency fund a while ago).
Regulation D was removed
Yeah, I’m aware, and I did try using my savings account that way for a time. However, I do find value in separate “checking” and “savings” accounts for money organization. Basically, here’s how my money flow goes:
- Paycheck -> savings
- Recurring transfer savings -> checking for spending
- Manual transfer checking <-> savings as needed
But you’re right, you can get most of the benefit by using a savings as checking (or have checking auto draft from savings). I keep a budget, and this structure keeps me honest (I guess I could have two savings and get the same result).
However, the bank account can’t fulfill other benefits, like state tax savings on interest or the ability to invest part of my savings into t-bills or funds(I can get a CD though). I’ll also need a brokerage account regardless (I’m not getting an HSA through my bank), so this helps consolidate my accounts a bit, and it turns out the debit card is way better than any bank account I’ve had.
What happens if SoFi no longer has the best rates? You either accept that or move elsewhere. You already need direct deposit to get the best rates, when will they add needing debit card transactions as well? That kind of thing is pretty common with banks since they may not need to be as aggressive in getting deposits at some point if the loan market cools. I think that’s a lot less likely to happen at a brokerage, and even if it does, I can just buy other assets, like CDs , Treasuries, etc. So I expect the brokerage to offer a better product more consistently.
I’m not saying anyone should switch immediately, only to consider a brokerage the next time they go shopping for a new account.
Selling while the market is down well still put you ahead of cash returns
I don’t think that’s necessarily true, it all comes down to when you’re likely to need that cash and how much the market has tanked. By the time you have enough assets that the difference doesn’t matter, you also have enough assets where the extra you’d potentially get by investing it doesn’t matter.
Regardless, that’s not really what this is about. I’m discussing bank vs brokerage account, not investing vs not investing cash reserves…
I keep a budget, and this structure keeps me honest
It’s not clear why you don’t have it all sit in brokerage checking instead of split between savings? Personally I find any sort of attempts to “trick” yourself into certain spending behaviors when it would be more optimal to do something else with better discipline to be silly.
However, the bank account can’t fulfill other benefits, like state tax savings on interest
How much interest are you making? For every 1000 you have in SPAXX, let’s say you make 5% interest on it, so $50. You can take 30% of that income off of your state taxes, so $15. Let’s say your state taxes are 5% because I’m not sure where you live, so that’s 75 cents per 1000 that you’ve saved (did I do that correctly?). Returns being 5% is highly abnormal, so this is best case scenario at the moment.
the ability to invest part of my savings into t-bills or funds(I can get a CD though).
Unless you can sell these fully liquid I don’t see the point. You might as well put it into these types of accounts normally if that’s where you want money to be. If your money is truly tied up in t-bill ladders then it seems less liquid than selling stocks.
the debit card is way better than any bank account I’ve had
Good banks have good debit cards.
What happens if SoFi no longer has the best rates?
I’m not married to SoFi, but if it was severe I would move. I already have accounts at most of the big ones so it’s not a big deal to me. Money market accounts are not guaranteed to be the highest rates either, and when I switched a few years ago HYSAs were leading money market returns. When that becomes the case will you move? Personally I don’t keep enough cash to sweat $0-10 per year.
when will they add needing debit card transactions as well? That kind of thing is pretty common with banks since they may not need to be as aggressive in getting deposits at some point if the loan market cools
This doesn’t happen at normal banks. This is common with very specific banks that offer really high returns compared to normal HYSAs. I don’t think these sorts of banks are ever worth it unless you’re holding onto a ton of cash, which I also don’t think is good.
Regardless, that’s not really what this is about. I’m discussing bank vs brokerage account, not investing vs not investing cash reserves…
It’s relevant because your entire emergency fund strategy changes when you keep most of it in a real brokerage account instead of with money market. You are talking about how to optimize your big pool of cash, but I’m saying that you should focus less on chasing 0.3% returns on your cash and more on keeping less cash around in the first place. I keep about $3-4k cash around liquid as money that I could use today if I needed to. If I need more money for an emergency, I can still cash it out of my brokerage account very quickly without needing to keep the full 6 months worth of expenses tied up in cash. Note that I have a ton of money in raw brokerage because I make too much money to put it all into tax advantaged spaces. If you don’t make enough money to outpace your tax-advantaged spaces it’s possible that you don’t have any money available to play with in raw brokerage to start with.
it all comes down to when you’re likely to need that cash and how much the market has tanked. By the time you have enough assets that the difference doesn’t matter, you also have enough assets where the extra you’d potentially get by investing it doesn’t matter.
I’m not sure what you mean by the second part but as for thinking that having your emergency fund in a brokerage account isn’t worth it: if you have very bad luck you might lose money in the short term, e.g. putting money into stocks, market crashes, then you have an emergency. Even in this case, unless you continue to have an emergency frequently and with every downturn, you will still come out ahead of cash if you continue with the strategy after your first emergency. On the flip side, in the average case if you have an emergency without the market being down or best case don’t have an emergency for the first few years, you’ll have outpaced any returns that cash will give you for quite a while, and this will continue to grow indefinitely. Stick it in bonds if you’re risk-averse, but keeping it in cash is wasting money. Cash returns are very high right now and it’s easy to feel comfortable with your 5% money market, but the calculus will change when returns go sub-1% again.
“trick” yourself
It’s less that and more a reminder to double check spending if I run out early. Our spending isn’t uniform month to month (e.g. may have a car repair, insurance due, etc), and usually my buffer is enough to cover that (e.g. I budget $X/month for car repair, $Y/month for insurance, etc).
So if my checking needs to be manually refreshed, something is probably more expensive than I budgeted for and I may need to update the budget. Or maybe I’ve been slipping on spending and need to make a small adjustment.
How much interest are you making?
Not much. On my checking, it’s like $50-60/year. In savings, it’s about 2-3x that, so something like $200/year. But that’s not counting my efund money, which is invested in t-bills and is like 10x the combined amount in checking and savings.
So I’m saving a few dollars in state taxes on checking and savings, and like $50 or so tax savings from t-bills. So it’s not a ton of money, but it’s free, so I might as well take advantage.
the calculus will change
Sure, and a brokerage is the best place imo to have cash parked if you want to chase returns on cash. If money market funds drop, I can look into corporate bonds, municipal bonds, or a variety of other fixed income investments.
If I’m at a bank, I just ride the ups and downs and that’s it.
sell fully liquid
Yeah, I can sell CDs and t-bills within a couple days, which is way more liquid than I need it to be. Usually I’ll just need money within a couple weeks since I would otherwise transfer money 2x/month.
HYSAs were leading money market returns
I’m guessing you were comparing money market accounts, not money market funds. Even so, when returns are extremely low (say, 0.50% for the best savings account), the difference in returns really aren’t interesting.
So I don’t think HYSAs will beat money market funds, based purely on how they are structured, unless you’re talking about promotional rates or something.
Banks borrow at the federal funds rate and encourage deposits at something under that so they can borrow even more. If HYSAs had to pay above the federal funds rate for deposits, that means things are extremely out of whack.
how to optimize your big pool of cash
No, I’m talking about how to consolidate accounts and get some better returns and benefits at the same time.
stick it in bonds
Money market funds essentially are bonds, they’re just really short term bonds with near guaranteed upside. In fact, some money markets buy exclusively Treasury bills or t-bill adjacent securities (like t-bill purchase contracts). That’s why returns for MMFs are so close to t-bill returns, they invest in very similar assets.
So if MMFs tank in returns, so will bonds because that means the Fed funds rate has dropped. However, it’s highly unlikely to go negative, unlike a Treasury fund, because they limit themselves to very short term contracts so they don’t get hit by market risk.
So if preservation of capital is your primary concern and returns are secondary, you really can’t go wrong with money market funds. They’re slightly more risky than savings accounts, but you usually get rewarded handsomely for that slightly increased risk with usually something like 0.50% higher returns vs top HYSAs.
But again, the argument for moving to a brokerage shouldn’t be mainly higher returns, but consolidation, benefits, and options.
I think of my checking account as a buffer - direct deposit goes in, bill pay goes out, any amount beyond this month’s bills goes to/from brokerage. My particular account has a minimum balance and the actual balance hovers right around there. Any interest lost/earned on that balance over a year isn’t enough to worry about, and no payee/payer ever sees the magic numbers to access my real savings.
The key is not to have cash just sitting around, regardless where. If you don’t have immediate need, get it into investments. Modern mutual funds or ETFs are liquid enough to serve as emergency fund - unless your ‘emergency fund’ is something you dip into every other month. While interest rates are so high, it may not feel pointless to keep cash, but even those high rates are only 1-2% above inflation (and have only risen above inflation recently). Get your money back into the economy; don’t pay a banker to do it for you.
Yeah, the extra interest isn’t a ton. I was already keeping my checking balance pretty low, so the extra interest is something like $4-5/month (average balance is like $1k). That’s not life changing money by any stretch, but it still adds up, and I didn’t need to do anything for it other than move where my autopay goes.
The more important thing to me is being able to consolidate accounts. I’m going to have a brokerage account anyway, so I was able to move my checking and savings to it, plus my efund (was at Treasury Direct in ibonds), and I get an extra $50-60/year as well.
Modern mutual funds or ETFs are liquid enough to serve as an emergency fund
But are they dependable enough? Let’s say the market crashes 30-50% and you lose your job at the same time, how would you feel if your 6-month efund became 3 months overnight?
Also, how big of a difference would that be overall financially? As in, what percentage of your net worth is that efund? When it’s a big part of your net worth, it’s a bigger hit if you lose your job in a market downturn, and if it’s a small part of your net worth, the difference in returns won’t be huge.
So that’s why I keep my efund in stable investments. I don’t hold bonds in my portfolio, so I just treat my efund as my bond portion, and it’s currently a fair bit less than the 10% experts recommend for bonds, so I don’t really see a point to go even more aggressive.
So, definitely coming from a position of privilege, but I think of a 6 month efund sitting at 2% (historical) MMA or having a couple of 10-20% years. If you’re looking at an efund that’s 105% of what you put in vs 150%, then that crash is a much smaller concern. Especially because the actual nadir of values (at least in the last 30 years) has been quite short lived. Why I distinguish between emergencies and events that happen once or twice a year: personal emergencies are kind of likely to coincide with stock market dips/crashes, but there’s a lot of growth potential in the meantime. I have taxable and tax-sheltered investments, and don’t distinguish a specific efund.
Risk tolerance is definitely a thing, though. I was 98% equities, 2% cash for 20 years, and only started getting some junk bonds when the yields got above 7%.
And that’s why percentage of invested assets matters.
If your efund is 50% of your invested assets, you’re probably near the beginning of your working career and a layoff is somewhat likely in a downturn. So if that happens, you could burn through all of your assets in the time it takes to find a new job, and that sucks. If your efund is 10% of your invested assets, losing half of your efund won’t really matter all much because you have other assets to back you up. But also having 10% of your invested assets in secure investments also won’t drag your growth all that much since a 90/10 stock/bond split has almost identical performance vs 100/0. If it’s significantly <10% of your invested assets, you’re nearly or already capable of retiring and don’t need an efund anymore (2% is that magic number assuming a 6 month efund).
I personally am in a single income family with kids, so having cash to pay for necessities is really important to me. In fact, I had 12 months when I was working as a consultant, which I’m glad for because COVID killed all of my contracts and nobody was hiring, so I lived on that cash for the better part of a year. When I was single, my efund was much smaller because I had the option of moving back home, sleeping on a friend’s couch, etc if things went sideways.
So the more screwed you’d be if you lost your job, the more of your efund you should have in cash.
I personally keep about 3-6 months of expenses in tbills, and I have a taxable brokerage account with more assets if necessary. I also keep about a month of expenses in cash in my money market funds as slush between paychecks. Other than that, the rest of my assets are in stocks, as in, pretty much 100% stocks in a 70/30 domestic/international split. I happen to need <10% of my assets for my efund, but I’m still unwilling to part with it because it saved me when I lost my job (and the phenomenal returns right now certainly help). So I just count it as the bond portion of my portfolio and call it a day.
t-bills/notes/bonds … some brokerages allow them to be auto-rolled
Fyi treasury direct let’s you do that too
And you can buy in $100 increments, which is cool, though you lose the ability to sell on the secondary market.
I thought about going that route, but I really hate dealing with TD’s website, and I’m going to sell my ibonds so I don’t need to login again. It’s not as bad as I make it out to be, it’s just annoying enough that I’d rather go through a brokerage instead.
I’ll second this. I ditched my bank for Fidelity three years ago. So far no issues. Their web interface for bill pay isn’t as nice but its functional. Its also nice at tax time because I only need to wait for the one 1099.
I’ve heard a lot of positive things about the Fidelity Cash Management Account and I’ve been seriously researching and considering opening one. Am I correct in understanding that I could have it set up so that my direct deposit goes into the CMA and is automatically used to buy into the money market fund, then have it automatically liquidate the money market fund to cover expenses and withdrawals from the account?
I don’t think you can change the core position of a CMA account, or have cash deposits auto sweep to a money market fund, though you can auto sweep out of your money market fund (e.g. if your core position is $0, your money market funds will be used for purchases). The core position for a CMA is an FDIC insured account with lower yield than most HYSAs.
However, that’s only applicable to the CMA, you can change the core position of other account types. I think the Fidelity account is the main one where you can set your core position to a money market fund (like SPAXX), and I think it defaults to SPAXX.
And then there’s their Bloom products, which IIRC can only use SPAXX as their core position.
It’s important to note that the awesome debit card is only for the CMA, the Bloom product’s debit card is more similar to traditional bank account debit cards (no ATM reimbursement, 3% foreign transaction fee, etc), and I think other account types have similar terms to the Bloom debit card. The Bloom products also give a small amount of cash each year for transferring in cash.
So in short, you’ll want the CMA for the debit card and something else for the better core position. I leave my CMA @ $0 unless I go on a trip, and then I put in enough cash for the trip and transfer everything back out when I get home. I put all of my regular spending on the Bloom accounts because SPAXX is good enough and I like the small cash bonus each year (there’s also debit card spending rewards for the Bloom debit, but I don’t use it).
Fidelity has a lot of products and they can be a little convoluted, but once you get it set up it’s smooth.
Oh, that makes sense. Thanks for the very thorough and helpful response.
After reading this and some other posts, it looks like what I actually want is the standard brokerage account, so I can have SPAXX as my core position and make other investments in the same account. It looks like the brokerage account has all the same features as the CMA except for the debit card perks, but I almost never use debit cards.
I did not know about the yearly “Savings Match” on Bloom until you mentioned it here. Maybe I’ll also open that account and throw $300 in for the cash bonus.
Yeah, no worries! I hope it works out for you.
I also don’t use a debit card very often, but I like having it around just in case.
[SIPC instead of FDIC insurance - coverage is about the same]
You left out one detail. Technically if you have $100,000 in Money Fund A it means you hold 100,000 shares that are priced at $1 each. SIPC will protect you from losing your 100,000 shares but cannot protect you if the value of each share falls below $1. This is unlikely to happen, but is legally possible. There were some scares about this happening in 2008.
If you want to be rock solid safe you could choose a money market fund that is backed 100% by US treasuries, but you would earn less interest.
It actually happened twice:
The first case of a money market fund breaking the buck occurred in 1994, when Community Bankers U.S. Government Money Market Fund was liquidated at 96 cents because of large losses in derivatives.
In 2008, the Reserve Fund was affected by the bankruptcy of Lehman Brothers and the subsequent financial crisis. The Reserve Fund’s price fell below $1 due to assets held with Lehman Brothers. Investors fled the fund and caused panic for money market mutual funds in general.
Following the 2008 financial crisis, the government responded with new Rule 2a-7 legislation supporting money market funds. Rule 2a-7 instituted numerous provisions, making money market funds much safer than before. Money market funds can no longer have an average dollar-weighted portfolio maturity exceeding 60 days. They also now have limitations on asset investments. Money market funds must restrict their holdings to investments that have more conservative maturities as well as credit ratings.
Here’s a Wikipedia article about the Reserve Fund that broke the buck:
The fund dissolved in December 2015, having paid investors $0.991 per share.
In the first case, investors lost 4%, and I’m the second, they lost 0.09%, and the response to the second was to change the laws so to make money market funds more conservative so it won’t happen again.
Yes, it’s possible a fund will break the buck, but it’s incredibly unlikely.
you would earn less interest
Not necessarily, at least net of taxes. I pay state income tax, and my total gain net of taxes is about the same as other funds that aren’t state-tax immune.
For example, if I look at Fidelity, I’ll compare two funds:
- SPAXX - 30% Fed tax exempt, 5% 7-day average
- SPRXX - 5.07% 7-day average
- FLDXX - Treasury only, 5.01% 7-day average
My state tax rate (Utah) is 4.85% (it’s more complicated due to income-based credits, but whatever), so I would need to get 5.36% to have the same net return as FLDXX.
The situation looks even better at Vanguard because their funds have lower costs, thus higher net returns:
- VMFXX - 5.3% - 30% Fed tax exempt
- VUSXX - 5.33% - 100% Fed tax exempt
If I go with VUSXX, I’d need to get 5.72% to match my net returns. The math here is a bit complicated, so try out this tool to compare returns for different bond types for your state.
That said, we’re in a unique time right now with high Treasury yields, so YMMV going forward.
Interesting. I had not heard about the 2015 thing.
I have accounts with Ally, Fidelity, and Schwab currently, though Ally has been my main e-bank, Fidelity for an inherited IRA with various stocks (though I’ve only been selling these off as I need to eventually clear the acct), and Schwab is for a few $100 in “play” money I blew on meme stocks that have since gone to shit. I was planning on cashing everything out of Fidelity when the market improved a little more (knock on wood) and moving it all to Ally, but I may rethink that after reading this.
I didn’t realize the SPAXX fund was a money market acct that earned interest (I know it’s literally in the name), it’s just the default position if you sell off stocks. When it’s listed aside all the other stocks in the acct though, it doesn’t give any indication that it earns any interest.
Is there a good amount to buy t-bills at if doing a t-bill ladder, or would you just take however much you plan to invest in total and divide by ~26 (every other week for a year)? What’s the min amt you can buy at?
SPAXX
SPAXX is a money market fund, and it pays dividends, not interest. That’s a bit of a technicality, but there are some important distinctions in how they work.
Money market funds don’t pay a fixed dividend, they just pay based on whatever the fund earned for the day, and you get the dividend once/month (usually the first day of the following month). So treat them like a mutual fund that never changes from $1/share and pays dividends monthly. The important number to look at imo is the 7-day average, which says how much it has returned over the previous 7 days, and currently that is 5%. If you look it up on Fidelity, you can also see returns for different periods, just like with mutual funds.
What’s the min amt to can buy at?
For t-bills, you have to buy in $1,000 increments, and you can only auto-roll if you buy new issues. Depending on the maturity of the t-bill, new bonds are issued weekly or every four weeks. Here’s the tentative schedule for various durations of t-bills (PDF warning).
So if you want a 6-month t-bill, you’d buy in $1k increments evenly distributed over the six months. I personally do 13-weeks (~3 months) because the other half of my efund is in ibonds (will change soon), and I bought every two weeks because that seemed the easiest. If I went for 26 week t-bills, I’d probably buy every 4 weeks or so. You’ll probably want to space them out instead of buying all at once so you can just cancel autoroll instead of selling on the market in case t-bill returns increase dramatically and your t-bills are worth less (e.g. the thing that killed SVB).
If you’re lazy, you can just buy a t-bill fund like TBIL if you just want to dump money in instead of building a ladder. I personally like the ladder though, so I went through the effort to build it.
All of this applies to Schwab as well, and they have better money market funds (higher returns), so you may want to consider going there. I picked Fidelity because I already have an account there and won’t be moving anytime soon because their HSA is unmatched, but since you have both, you should look at what Schwab offers as well.
Of note regarding money markets: Nothing beats the Vanguard money market. It has the highest return currently (floating at around 5.28 last I checked) combined with the lowest expense ratio of any ‘normal’ fund (one that doesn’t have a 100k+ minimum deposit required).
Schwab also has a higher return than fidelity, and a slightly lower expense ratio.
Fidelity has the worst returns, and the highest expense ratio. However, the difference between the three are mostly inconsequential unless you’re plopping a lot of money in there. Still, free money is free money, and all three brokers are reputable.
Vanguard has the worst customer service out of the three though, so that kinda negates the better returns, especially if you ever find yourself in a position where you need it.
Upside of fidelity are the zero cost index funds they offer.
To the OP’s point, I think you make a strong case. Still probably good to have a regular local credit union as backup and to easily deposit cash, (fidelity’s unusual bank account number can very occasionally not jive with some things reportedly).
Also, there is a security concern if your brokerage account is attached to your cash account, as I believe it would be possible to drain the brokerage account with the cash accounts debit card, as the money market assets in the broker account will be liquidated to cover expenses incurred in the cash account if it becomes emptied.
I also never looked into how Fidelity deals with fraud. Shwab’s cash account is a real bank, while fidelity’s is technically not, so there might be some differences there that I’m not aware of.
Yeah, the Vanguard money market funds rock, but they don’t have debit cards/account numbers AFAIK, so they can’t really be used like a normal bank account. Fidelity and Schwab both can, so they’re a better replacement for a traditional bank account.
And expense ratios don’t matter for money market funds, the important thing is net return, which is how they’re all advertised. SPAXX has ~5% returns, which is after taking fees into account, so it doesn’t really matter that it has 0.77% or whatever fees. That said, most of the difference in returns can be explained by fees, so it’s interesting if you’re wondering why two similar funds are different.
And the 0% funds are cool, but they really don’t matter much. The difference between 0% and 0.04% or whatever is smaller than the tracking error between funds. I do invest in FZILX in my HSA, but I don’t think it’ll perform much differently vs competitors like VXUS.
The upside to me is the awesome HSA, decent customer service, fantastic debit card, and auto roll feature for t-bills. Schwab is similar. If Vanguard offered those features, I’d probably use them instead (I have my IRA and taxable brokerage accounts there).
security concern
I don’t think that’s a thing.
If you use one account for everything, I think it will auto draft from money markets and mutual funds, but it won’t do any market trades like selling ETFs. I personally don’t use it that way and have three accounts (and an HSA): two Bloom accounts and a Cash Management Account. The two aren’t connected, so I can’t pull from the CMA using my Bloom debit and vice versa, nor would it pull from a different account automatically. If I had a brokerage account, it would be separate from the CMA and a Bloom accounts.
So what I do is leave my CMA empty and the debit card locked unless I need to use it, and then I transfer from Bloom to the CMA so there’s cash to withdraw, and then unlock the debit card. That’s probably way more paranoid than necessary, but I rarely use my debit card, so I’m okay with it.
