Fixed Income Investments – Using Treasury-Only Money Funds
Lately I have been considering how to invest my cash. “Invest your cash?”, you may ask. Yep! Invest my cash.
I realize that bank accounts are insured by the FDIC for up to $250,000 per tax payer ID. But at what cost? Interest rates are extremely low, making the amount of money you can earn seem hardly worth the time or risk.
You can actually get a better interest rate with CDs, if you don’t mind not having immediate access to your funds. Did you know that Federal law REQUIRES a penalty of at least seven days’ interest for any early withdrawals on accounts classified as time deposits (which is what a CD is)? Additionally, since there is no maximum penalty documented, banks can, and usually do, charge more.
Recently, I have learned of a different alternative: Treasury-only money market funds. What sets these types of fixed income investments apart from others is that they only invest in short-term US Treasury Bills. Currently, Treasury Bills are the safest investments available. What I like about Treasury-Only funds is the fact that they do not invest in other fixed income investments such as corporate debt or mortgage backed debt. They only invest in items that are 100% backed by the US Government. The amount of interest that they pay is slightly less, but it is well worth it for the security it provides in our current economic environment.
Most of these types of funds use banks as a custodian for the securities. If the bank fails, the money you have invested in short-term Treasuries is completely safe. Additionally, Treasury-only money funds provides you with check writing privileges. What other fixed income investments offer this? None that I know of!
With all of these benefits, I have began to wonder if it would not be a great idea to use this kind of fund as my banking account. As I began to research this a bit further, I discovered a few more advantages:
1. Higher Yields – The yield offered on an average personal checking account is pathetic. I am not even sure I earn ANY interest on my checking account; my savings yes, but my checking – I do not think so! Treasury-only money funds give you more bang for your buck.
2. Only One Account Needed – Currently, I have 1 savings account, 1 checking account and 1 money market account. I am constantly moving money from one to another as my cash flows in and out (mostly out). With a Treasury-only fund, all of my cash can be kept in one account (no matter how much I have). I always hate it when my money market account drops below some magical threshold where the bank starts charging ME money.
3. Instant Access – You maintain complete access to your account at all times. You can withdraw the entire amount at anytime you want with absolutely no penalties. Since you have check writing privileges, you can either write a check or wire the money to some other bank or destination.
4. Your Money is Always Working – Many times I will move money from my checking account to my money market account so that my cash is not just sitting there goofing off. I hate to see it earning zero percent interest when it should be producing something. I guarantee that the bank is making money from it. In a Treasury-only fund, I do not have to worry about this. My entire balance is working, earning interest for me on a daily basis.
5. Interest is Exempt from State and Local Taxes – At the end of the year you will have to pay tax on the interest you have earned to the federal government, but not your state and local governments. If you had money tied up in CDs, you would have to pay taxes to both.
As with anything good, there should be a few disadvantages to using Treasury-only money funds. The bad thing is, I can only think of two.
1. Rigid thinking – It is difficult for me to think of Treasury-Only money funds as anything other than a normal fixed income investment. I am having a hard time believing that I can actually use them like a bank AND earn more interest, while paying less fees.
2. Check Minimums – Most funds that I have researched impose minimum amounts allowed for each check. This amount is typically $50 to $100. If you write numerous checks each month for less than this amount, using a Treasury-only money fund may not be for you.
I am interested to here what you think about this idea. Has anyone tried doing this before? What I am missing?
