June 2019 interest rates: Gov't Money Market Fund 2.33% state-tax-free, bank MMA 2.4%+. Where should you keep the cash portion of your financial assets? The most important considerations are safety, liquidity, income, and convenience.
For convenience, you should have a checking account at a local bank or credit union. Keep enough in the account to avoid monthly fees and to cover your ordinary ongoing expenses. If you have more cash beyond that, consider where to keep it for maximum safety and income.
The absolute safest choice is U.S. Treasury bills. You can invest directly online at treasurydirect.gov. However, if you need the money before the term expires, you need to transfer the securities to a broker and sell them on a stock exchange, which a hassle and incurs transaction fees.
For convenience and liquidity, it's better to invest in U.S. Treasury securities indirectly through a government-only money market fund. The best that I've found is the Vanguard Federal Money Market Fund, symbol VMFXX. Another good choice is the Fidelity Treasury Only Money Market Fund, symbol FDLXX. The Vanguard fund has a very low expense ratio, so it offers the better interest.
vanguard.com -- Click "Individual Investors"; then in the search field in the upper right, enter "VMFXX".
fidelity.com -- In the search field, enter "FDLXX".
It's easy to move money between your local bank and the money market fund. You can log in online and order money transfers free of charge. It can take a few days to complete a transfer.
One advantage of investing is U.S. Treasury securities, whether directly or through a money market fund, is that the earnings are free of state and local income tax.
The Vanguard VMFXX fund invests partly in repurchase agreements. It lends money to someone for a specific period of time and takes government securities as collateral. Because the interest is paid by the other party, not the U.S. Government, that portion of the interest is not state-tax-exempt.
At the end of each year, Vanguard reports the portion of the year's interest that is paid by the Treasury (about 80%), so that you can report the remaining part on your state income tax return.
If you are so fortunate to $50,000 or more in cash, Use the Vanguard Treasury Money Market Fund, symbol VUSXX, which invests entirely in U.S. Treasury Bills, so the earnings are 100% free of state and local taxes. The initial investment must be at least $50,000, but if the balance falls below that, there's no penalty. Fidelity has similar good options for very big accounts or if you are investing from a retirement account (IRA, 401K).
In a financial crisis, companies can go bankrupt, corporate bonds can default, but the U.S. Treasury always meets its obligations. The Treasury derives its strength from the power to tax the income of American citizens and businesses, making it the most reliable debtor.
Another good alternative is to put your money in a high-interest account at a bank insured by the FDIC, a U.S. Government agency, as described in the next video.