Why do I keep my cash in money market funds?

Could somebody please remind me again why I keep my cash in money market funds? The standard, traditional reason is that banks pay too skimpy an interest rate. But... that is no longer completely true. Sure, it is still true that most banks pay as close to zero as they can manage with a straight face. Just last week a bank representative actually made a face and cringed when she said that the account that she could offer me paid 0.1%. I mean, like why even bother?! But, as the so-called credit crisis has spread, suddenly there are more and more banks that are not just competitive with money market funds, but even pay yields well above the top money market funds. Sure, some of them are clearly on thin ice, such as Countrywide and Capital One Bank (and Indymac Bank was one of them), but others seems on relatively solid ground. Besides, they are FDIC-insured anyway.

Actually, there is one other reason for choosing money market funds: you have a lot more than $100,000 and it is too much hassle keeping your millions spread between dozens of banks. Sure, as we saw yesterday, a money market fund could "break the buck", but a lost of 3 cents or even 10 cents is nothing compared to losing 100% of your excess over $100,000 in a bank. If you have millions in cash, institutional money market funds do pay higher yields than all but a relatively small number of banks. And, money market funds do tend to have more flexibility than high-yield bank accounts and CDs.

But for those of us who do not have millions and may in fact have under $100,000 in cash, some banks are in fact once again appealing places to store cash.

One remaining reason for money market funds is for corporate 401k retirement plans, but I am out of that business, for now.

I currently have a small account at Capital One Bank here in New York City, but I have not been completely satisfied with their service, so I have been looking around. I considered CommerceBank since they offer free accounts and I had an account there four yours ago. Unfortunately, they are actually having trouble opening a new account for me since I had an account that was closed. Besides, they offered me a checking account that paid 0.1% and their money market account yields were rather skimpy. It turns out they do have a money market account that yields 3.00% APY for balances above $25,000, but below that the rates are poor.

In truth, interest checking at banks is still quite abysmal, and I am reasonably happy with doing my checking from my Fidelity account.

Just today I walked by Sovereign Bank a few blocks from my apartment and saw that they were offering a $300 bonus for new business accounts. If you open up a free business account and a free personal account and put $15,000 in any accounts, including their money market account that yields 2.75% APY or a 6-month CD that yields 3.50% APY, and you use the check cards for the two accounts at least six times each, then after 90 days (actually 105 days) they will credit $300 to your accounts. That is actually a fairly good deal, especially in today's environment. No money market mutual fund comes even close.

When I first starting talking to Sovereign, they did not mention anything about the rates and even when I said I was not happy with the kinds of rates banks were paying they still did not say anything. I was expecting that my $15,000 would be earning 1% or even less in a money market account. Then I casually asked what the rates were and even the assistant manager was surprised when he looked them up on his computer and found that they were paying 2.75% APR for only $15,000 in a simple personal money market account. Not bad. Not bad at all. Even better, that rate jumps to 3.00% APY for balances above $25,000 and 3.25% APY above $75,000. All with FDIC insurance.

As far as I can tell, Sovereign Bank is in decent financial shape. They are a regional bank here in the Northeast. The main consideration is that my cash will be FDIC insured. Even if the bank were in great shape today, who knows what shape they might be in six months from now.

Tomorrow morning I may go ahead and open the accounts and later move $15,000 from my Fidelity account. I'll continue to do my primary "banking" through Fidelity (especially since I do get a semi-decent interest rate for core cash that rises and falls each month as my income flows in and I pay my bills). I'll see how well the Sovereign account works out and how the interest rates evolve and then consider moving more of my Fidelity cash a few months down the road.

The real bottom line is that I earn 2.60% 7-day yield at Fidelity versus the prospect of a 3.00% APY (equivalent to about 2.94% 7-day yield) at Sovereign with FDIC insurance to boot.

Convenience is still a big factor for me, but it looks as if I can in fact get a really sweet deal on a bank account without a lot of hassle.

In any case, the allure of money market funds is fading quickly. It will be interesting to see if banks recognize and exploit this historic opportunity.

Even so, I still find it annoying that Fidelity offers me a more attractive deal for "checking" than any of the banks do. The advantage for the banks is that there are still some traditional "banking" features that Fidelity does not offer.

The bottom-bottom line here is that I am still very comfortable with keeping my cash at Fidelity in money market funds, but banks are once again a competitive option for storing cash. At least this is the case today.

How all of this will evolve in the coming months and years (or even weeks and days) remains to be seen.

-- Jack Krupansky