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.

You Need an Emergency Fund

You need an emergency fund so start one today. You will sleep better at night, guaranteed.

Why do you need an emergency fund? Your car breaks down. You become ill and are faced with medical bills. You are faced with unexpected travel obligations. Your home needs repair. You lose your job. You get the point.

How much do you need in your emergency fund? There are many opinions ranging from as little as $1000 up to as much as one year's worth of living expenses. What is right for you will depend on your individual circumstances and comfort level. If you are single with a stable job with no dependents and you don't own a home then you probably can get by with a $1000 emergency fund. However, if you have a family with a single income and own a home, then I would recommend a minimum of 6 months worth of living expenses.

So start your emergency fund today and don’t stash your cash under your mattress. Make sure you are earning a competitive interest rate. I recommend online banking.

Bank Online and Save Money (and Trees)

If you aren't banking online, what are you waiting for? You can get a better interest rate and save a tree in the process. Most likely your "bricks and mortar" bank is paying you very little interest for your hard earned savings. You can do much better online. My favorite is ING Direct, which pays competitive rates with absolutely no fees.

As an extra bonus, you might save a tree or two. According to Javelin Strategy and Research, consumers can save 17 million trees and avoid 4 billion tons of greenhouse gasses each year by eliminating paper checks and bills.