Online Journal for the Moose Pond Investors Club

Parking Your Safe Money

This is a response to a question by one of my young adult children. She was looking for a place to put some safe money (i.e., funds that she might need in the next 1-3 years) and wanted to obtain a better rate of interest than that offered by her bank.

Vanguard money market funds are a good place to park money that you may need in the next 1-3 years. At your tax bracket, I would not worry about finding a tax-free fund. Tax free money market funds don’t become advantageous until you reach the 28% tax bracket or higher. You can ask Vanguard for a check book for your money market account and redeem shares by check. However, the check has to be $250 or more.

Here are three suggestions. The fund are listed with the safest funds first. The spread between the Treasury-based fund and the prime rate fund is very small. It comes out to about a $25 per year difference on $10,000. So you might want to stay with safety (either Treasury or Federal). That way if the world goes nuts, your funds will be secure.

Vanguard Treasury Money Market Fund (VMPXX). It is currently yielding 4.84%.

Description: The Fund invests solely in high-quality, short-term money market securities whose interest and principal payments are backed by the full faith and credit of the U.S. government. At least 80% of the Fund’s assets will always be invested in U.S. Treasury securities; the remainder of the assets may be invested in securities issued by U.S. governmental agencies. The Fund maintains a dollar-weighted average maturity of 90 days or less.

Vanguard Federal Money Market Fund (VMFXX). It is currently yielding 5.06%.

Description
:
The Fund invests primarily in high-quality, short-term money market instruments. At least 80% of the Fund’s assets are invested in securities issued by the U.S.
government and its agencies and instrumentalities. Although these securities are high-quality, most of the securities held by the Fund are neither guaranteed by the U.S. Treasury nor supported by the full faith and credit of the U.S. government. To be considered high-quality, a security generally must be rated in one of the two highest credit-quality categories for short-term securities by at least two nationally recognized rating services (or by one, if only one rating service has rated the security). The Fund maintains a dollar-weighted average maturity of 90 days or less.

Vanguard Prime Money Market Fund (VMMXX). It is currently yielding 5.09%.

Description: The Fund invests primarily in high-quality, short-term money market instruments, including certificates of deposit, banker’s acceptances, commercial paper, and other money market securities. To be considered high-quality, a security generally must be rated in one of the two highest credit-quality categories for short-term securities by at least two nationally recognized rating services (or by one, if only one rating service has rated the security). If unrated, the security must be determined by Vanguard to be of quality equivalent to securities in the two highest credit-quality categories. The Fund invests more than 25% of its assets in securities issued by companies in the financial services industry. The Fund maintains a dollar-weighted average maturity of 90 days or less.

The expense ratio is 0.29%. Other mutual fund families have similar offerings. For example, see Fidelity’s offerings. Since Vanguard is the only large mutual fund family that is owned by its share holders, I tend to prefer it. Vanguard also offers some of the best index funds and exchange traded funds (ETFs) available.

One Response to “Parking Your Safe Money”

  1. Gary Simms says:

    After the series of interest rate declines following September 11, 2001, the Vanguard Tax-Exempt Money Market actually paid a higher rate than the Vanguard Prime Money Market Account BEFORE you adjusted it to a PreTax rate.

    Always check the rate to be sure. Don’t assume.

    For monies that you can spare to be without for a slightly longer time, consider Vanguard Short Term Federal Bond Fund.

    The fund pays a bit more than the VG Prime Money Market Account, a reward for the small fluctuations in Net Asset Value (Price per share).

    Although not invested in Treasury Bonds, the loans are to government acencies and thus, have the full guarantee of the US Federal Government.

    They also have significantly less risk than the Short Term Corporate Bond Fund from Vanguard.

    Over the long term the small added return adds up.

    In addition, this fund is available in Admiral Shares for those who qualify and reduces the annual expense ratio by 33%.

    Every little bit extra I can get is just free money!

    Gary

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