Advantage 2: Low fees. When a bank quotes you a yield on any kind of account, it always quotes you the yield before it deducts a variety of service fees. With bank charges and fees currently very high, it’s almost impossible for most bank customers to collect anything near the advertised yield. In contrast, when a money fund quotes you its yield, it always quotes the yield after it deducts all its expenses and most of its fees. Of course, the past or current yield is no guarantee of future results. However, the yield quoted is the actual net yield that investors in the fund are earning.
Advantage 3: One account for both checking and savings. At banks, most customers divide their money between a checking account (where they give up most of their yield) and a savings account or CD (where they give up immediate access and liquidity). No matter what, it’s almost impossible to get both optimal liquidity and yield in the same bank account. In contrast, Treasury-only money funds let you keep nearly all your cash assets, whether they’re for savings or for checking, in one single account. As a result,
- You have complete access to all your funds at all times.
- You can withdraw the entire amount, with no penalty whatsoever. Just write a check or request a wire transfer, and it’s done.
- Your money consistently earns competitive current market yields.
- You never have to worry about leaving too much in your checking account at low rates. The full amount is available for checking at all times, earning full interest.
- You continue earning interest on your money up until the moment your check clears. The longer it takes for payees to cash their checks, the more interest you make on this float.
- If you want to use your account as your most active checking account to pay most of your bills, that’s even better. The more you use it, the more you take advantage of the float.
- In short, you are always getting maximum liquidity and maximum yield on your entire balance.
Advantage 4: No limit to your account size. Bank deposits are federally insured up to $100,000—but not beyond. All deposits over $100,000 are at risk, particularly in a financial crisis. So when you use banks for your savings or your checking, you may have to use a series of maneuvers to keep your money safe from failure, including
- Spreading your CDs among various accounts. This means that you would have to keep track of several accounts at the same time.
- Making sure that your initial investment in each CD is actually under the $100,000 limit. Otherwise, the accumulation of accrued interest could put your balance over the limit, and that portion would not be covered by the FDIC.
- Calling your bank regularly to make sure (in the case of large checking accounts) that the account is not over the $100,000 FDIC limit. If there are several large checks outstanding, your bank balance could be over the limit. If the bank were to fail at that time, any excess amount could be lost.
With Treasury-only money funds, insurance is essentially a moot point because your funds are invested strictly in securities that are guaranteed directly by the full faith and credit of the U.S. Treasury Department. There is no limit on the Treasury’s guarantee of its obligations, whether you’re a beginning saver with just a few thousand dollars or a highnet- worth investor with substantial sums.
Note: There were more than 3,000 bank and S&L failures between 1980 and 2002, causing savers and businesses serious inconveniences and even outright losses. In contrast, there has never been a default on U.S. Treasury securities.
Advantage 5: Exempt from local and state taxes. The income that you earn on both Treasury-only money funds and bank accounts is subject to federal income taxes. However, when it comes to local and state income taxes, there is a difference: The dividends that you earn on Treasury-only money funds are exempt. The income that is earned on bank accounts and CDs—or on money funds that invest in CDs—is not exempt.
Advantage 6: Truly free checking. One way or another, nearly all banks charge you for your checking privileges. They may charge you a fee for each check you issue. They may charge you a flat monthly service fee. Or they may charge you a combination of both. Most Treasury-only money funds do not charge you any extra fee for checkwriting privileges. You can write as many checks as you want, as often as you want.
Advantage 7: Immediate liquidity. There are several ways you can withdraw your money from your Treasuryonly money fund:
- You can write a check against the balance in your account to yourself or to another payee.
- You can call or send a fax to your money fund’s shareholder service department, giving it instructions to issue a wire transfer. (Before the fund can accept your wire instructions, however, you will have to file a signed authorization ahead of time. This can be done when you open your account.)
- You can request that a check be sent to you directly from the fund. You can also authorize telephone instructions for redemption by check when you open your account.
No other kind of account (e.g., one with a bank, an S&L, a credit union, a broker, or an insurer) can give you this level of immediate access. For a step-by-step guide on how best to take advantage of your Treasury-only money fund and even how to use it for low-cost do-it-yourself checking, refer to The Ultimate Safe Money Guide (Wiley).
Read More : ADVANTAGES OF TREASURY-ONLY MONEY MARKET FUNDS
