Recently, I’ve been working on moving my family’s banking strategy from traditional checking and savings account to money market funds in a (Fidelity) cash management account. The migration has started, but I’m pretty happy with what I think will be the result.

Please note: I am not a financial advisor. I am not a finance professional. I should not be in charge of your money. I don’t even want to be in charge of my own money, but I’m the most inexpensive guy I know. This is not advice—just a record of a decision I have made and some background on why I did it.

A quick primer for neophytes

A bank account keeps track of your deposits. If you put $20 in, you can later ask for $20 back. The bank will invest most of that $20 (see: fractional reserve banking) and pay you interest for the privilege. The bank decides how much they will pay you.

An investment account holds financial securities and assets, like stocks, bonds, and exchange traded funds (ETFs). One kind of ETF is a money market fund. They invest not in stocks, but in “highly liquid near-term instruments [including] cash, cash equivalent securities, and high-credit-rating, debt-based securities with a short-term maturity (such as U.S. Treasuries)” (from Investopedia). For example, SPAXX, the Fidelity Government Money Market Fund and the default position for new cash management accounts, invests in 48.40% U.S. government repurchase agreements (are these bonds?), 29.47% U.S. Treasury bills, 21.00% “Agency floating-rate securities” (whatever those are), 3.45% agency fixed-rate securities, and 1.32% U.S. Treasury coupons. Bills, bonds, and coupons issued by the U.S. government are considered to be nearly as risk-free as the dollars that they also issue. ETFs are generally valued by “net asset value” (NAV), which is the classic assets minus liabilities. Money market ETFs target a NAV of $1.00 and pay dividends.

You may have heard of a money market account, which is a bank account, offered by a bank, that invests in money market-type securities for you. It is FDIC insured because it is a bank account that holds deposits, not an investment account that holds securities.

A cash-management account

Brokerages like Fidelity and Vanguard offer investment accounts that can act like bank accounts. That means that they have an account number and routing number for ACH transactions like a normal checking account. Fidelity’s offering goes the extra mile by offering a debit card, checks, and bill pay to make it near identical to a checking account. The difference is that, instead of taking dollar deposits and holding onto them, you purchase money market fund ETFs like SPAXX or VUSXX. Instead of paying a monthly interest payment, they return a dividend that is paid on a monthly basis. They’re effectively the same thing.

Pros of the all-money market fund strategy

• SPAXX has a current annual return of 5.10% and seven-day yield of 4.98%. In comparison, Ally has an APY of 0.10% on the checking account and 4.20% on the savings account.
• Instead of paying for things with my checking account except for large balances or worrying if there is too much or too little in the checking account, I can have all money flow in and out of a single account.
• Currently, most payments come out of my checking account, except for big things like the credit card payment which come directly out the savings account. I try to have enough money in the checking account for all expected payments while also minimizing the balance in order to use the saving account’s higher interest rate. This sometimes leads to overdrafts or excess transactions on the savings account, which has a monthly limit of 10 withdraws. With a single cash management account, all those worries go away. No moving money between accounts to get higher interest rates or avoid overdrafts.

Cons

• An investment account with money market funds is not insured by the FDIC.
  • However, I believe the risk of losing my money is only slightly higher than the risk of losing the funds in a regular bank account, so I am not worried about it. An article from The Finance Buff that is linked at the end goes into more detail, but the short version is that, even though it is not an FDIC insured bank account, it is an SIPC insured investment account which ensures that I will still get my ETFs if Fidelity goes belly up and that the risk of the fund breaking the buck and the NAV dropping below $1 is pretty miniscule. It’s larger than the risk of teeny risk of losing my dollar bills, larger than the itsy-bitsy risk of my bank doing something (what exactly, I don’t know) where I can’t get back my deposit, and larger than the not-impossible-but-as-close-to-impossible-as-I-can-imagine-zero-risk of $1 not being worth $1. I can live with that.
• The yield of a money market fund may drop beneath that of a savings account. However, if that happens and the difference is drastic enough to make a material difference, I can just move back to cash in a savings and checking accounts.
• You can’t deposit physical cash into a cash-management account. However, you can’t deposit cash into an account at Ally either, so I already live in that reality.

Future plans

Mr. The Finance Buff, in an article linked below, mentions that the equivalent of a savings account and certificates of deposit in this strategy is a ladder of short-term treasury bills and bonds. I haven’t ever done CDs because I fear the illiquidity, but the future is about growth and getting better, right? It’s an opportunity to learn.

Further reading

On money market funds vs. classic bank accounts

• The Finance Buff, Ditch Banks—Go With Money Market Funds and Treasuries
• The Finance Buff, No FDIC Insurance—Why a Brokerage Account Is Safe
• Investopedia, Breaking the Buck: When Money Market Shares Go Under $1

On one way to implement this strategy

• Bogleheads Wiki, Fidelity: one stop shop
• Bogleheads Forum, Fidelity as a one stop shop
• The Finance Buff, 2 Ways to Use Fidelity as a Bank Account

On other, fun things about money and banks

• Patrick McKenzie’s Bits about Money, The alchemy of deposits, a.k.a. how your bank doesn’t just take your twenty dollar bill and keep it safe, but rather how deposits are a financial product.