Short term savings yields were never intended to make you rich, but these days they won't even keep your money growing as fast as inflation.

However, short term yields can provide you with some upside to money that you need to keep liquid, such as emergency savings funds.  In the past, money market mutual funds, funds of securities that held their NAV fixed at $1.00 and provided yields by investing in high quality short term assets, were an excellent vehicle for parking your cash.  Since the financial crisis of 2008 however the playing field has changed somewhat and these money market mutual funds are offering yields that are little better than checking and savings accounts.  Average money market fund yields are currently running at just 0.06%.

In addition to the low yields, these money market mutual funds also come with added risk since the financial crisis, when the Reserve Primary Fund broke the dollar, or allowed their NAV to fall below $1.00.  The Federal Reserve Bank of Boston revealed last year that between 2007 and 2011 at least 21 out of 341 money market funds reviewed would have broken the buck without support from their sponsor firms.  These days, many money market mutual funds are closing their doors, and those that remain open are being subsidized by their sponsors to maintain the $1.00 NAV.

Both JP Morgan (JPM) and Goldman Sachs (GS) have already taken a first step to limit their subsidies by closing their European money market funds to new investors.  And money market fund deposits have dropped from $3.6 trillion in 2010 to just $2.6 trillion today.

What Alternatives Do You Have In a Zero Yield World?

Well, you could take the old fashioned route and simply stuff the money under your mattress, but that really is zero yield and extremely risky to boot.  Another alternative is the money market accounts offered by banks.  These accounts are still yielding less than the inflation rate, but they provide superior returns compared to money market mutual funds, have the advantage of liquidity, and are insured by the FDIC for up to $250,000.

The average bank money market account yields 0.49%, granted not much but better than money market mutual funds by far and with better liquidity and safety.  Even better, the top rates on these accounts can top 1%, subject to minimum deposits and other restrictions.

EverBank. based in Jacksonville, Florida is currently offering 1.25% for the first six months, 1.01% for the following six months, and 0.76% thereafter on balances up to $50,000.  There is a $1,500 minimum deposit, but no minimum balance requirement.  They allow up to 6 withdrawals or transfers per month, more than enough for an emergency fund or other short term cash fund.  And that rate is probably better than you would get on a 1 year CD currently, without the limitations imposed by a CD.

Why Bank Money Market Accounts Pay More

Money market funds used to have superior yields because they were not as constrained by regulations.  Since the financial crisis of 2007, money market funds have been constrained in the assets they are allowed to hold, as well as being required to hold more funds in reserve.  This has led to a decrease in yield, but has also provided more stability and safety.

Bank money market accounts work under different rules though.  Money market fund rates are based on the yields they can get from the purchase and sale of securities, but banks are able to artificially inflate yields to attract new customers and capital.

The FDIC has put rules in place to keep banks from offering rates that are unreasonably high.  Since 2009, they have been publishing the rate caps online for a variety of banking products, including the money market account.  Currently the rate cap for money market accounts is 0.85%, and though this rate only applies to banks which are not capitalized well, most banks seem to be sticking to the rate caps.

An additional advantage of bank money market accounts is the $250,000 FDIC deposit insurance.  While money market mutual funds are generally considered safe, there is no guarantee that your money won't lose value with a mutual fund.  The FDIC insurance is per depositor and per bank, so if you have a reason to keep more than $250,000 in cash you could simply open more than one account.  You could even use the same bank as the FDIC considers different account types as different holders.  So, you could get $250,000 of insurance on your savings account, plus another $250,000 on your money market account, plus an additional $250,000 on an IRA account, etc.

Of course nothing comes without negatives and bank money market accounts are no different.  The biggest negative is the fact that banks can offer rates that are high initially and then drop them later.  This is not too concerning though, so long as the banks disclose that rates may change in the future.  Many consumers simply change banks after losing a high initial yield.

Because online banks have a lower cost structure, they also offer the highest rates when it comes to money market accounts.  Ally Bank consistently has one of the highest yielding online accounts, currently at 0.84% with no required minimum deposit.  They also offer free checks and a debit card with up to 6 withdrawals per month.

Rates under 1% are no cause for celebration in a 3% inflation environment, but they sure beat keeping your money under the mattress.  Unless something changes dramatically, we recommend you avoid the money market mutual funds (unless you need a tax advantaged cash account) and stick with the bank money market accounts that provide superior yields and safety.