Why Your Emergency Fund Should Live in a Money Market Fund, Not a Savings Account

Most people park their emergency fund in a high-yield savings account and assume they are getting the best safe rate available. They usually are not. Bank savings rates are set by the bank and change slowly, often lagging the fed funds rate by weeks or months, especially on the way up.

Government money market funds hold short-term Treasury and agency paper, so their yield tracks prevailing short rates almost immediately. In a rising or plateaued rate environment, that gap can be 40 to 80 basis points, which on a 30,000 dollar cushion is real money for zero added risk.

The tradeoffs that actually matter

Money market funds are not FDIC insured, but the credit risk on a Treasury-only fund is effectively the same as the government backing your savings account. The genuine downsides are a one-day settlement delay on withdrawals and the fact that yield is not fixed. Keep two weeks of expenses in checking for instant access, and the rest earns more in the fund.

Safe and lazy are not the same thing. The safest asset is only optimal if you are also getting paid the going rate for holding it.