Stash Your Cash in Tax-Exempt Money Market Funds

Most of my emergency fund is laddered in CD’s currently averaging 5.10% yield with ING Direct. My last CD is set to mature in January 2009. The remainder of my emergency fund is earning 3.40% in an ING Direct savings account.

I’m a huge fan of ING Direct but I’m also a happy customer with Vanguard. I’m currently in the process of moving my ING Direct savings account to Vanguard’s Tax-Exempt Money Market Fund (VMSXX). The current yield is 3.22%. If you are in the 25% tax bracket, this is equivalent to a yield of 4.29%. Over the past year, VMSXX has returned 3.62%. This is equivalent to 4.83% in the 25% tax bracket.

The yield for VMSXX is based on a seven-day yield that is annualized. This yield can change every seven days based on supply and demand for the fund's holdings. So even though the yield is high today, this can change next week.

Also consider that Vanguard’s Tax Exempt Money Market Fund (VMSXX) requires an initial minimum investment of $3000. Keep in mind that money market funds are not FDIC Insured and even municipal money market funds are not completely risk free. However, I feel Vanguard has an excellent track record and reputation.