All,

For the past few months I have just been soaking up everything I can learn about investing , mainly for retirement but covering everything. One of my recent knowledge gains was in the area of money market funds which I never really knew anything about.

At first I thought with the emergence of high interest savings such as HSBC and ING, that money market funds were not really necessary. Money market funds seemed to only be yielding 3.5-4% while my ING was getting 4.5%. However, after doing more research I realized that the money market account can be both state and federal exempt as long as you pick the correct fund.

So my question is, should I go with a money market account instead of a high interest savings? This is all based on the fact that due to tax-exemption, the money market account will be better. Here is a link to the Vanguard account I would go with since I am in PA:

https://flagship.vanguard.com/VGApp/hnw/FundsSnapshot?FundId=0063&FundIntExt=INT

I already invest money in both 401k and Roth IRA, this would just be for emergency reserve money that I may need quick access to at some point.

It all depends on your tax bracket and the yields of the two funds you are interested in....

Here is a formula to figure out if a lower yield tax exempt fund is better than a higher yield taxable fund

Yield of Municipal
Bond Fund = Your taxable-equivalent yield1.00 - your federal
income tax rate

Once you do the formula take the answer and compare the yield to the taxable fund you are interested in and see if it is a better option. A general rule of thumb is the higher tax bracket you are in the more appealing a tax exempt bond fund is.

Really think about what kind of "emergency" can cause you to need the money fast.

Car accident with injury? You'll be in the hospital a long time, or already out before you get your first bill.

Home purchase? It takes some time to make it happen and you don't need much cash in hand quickly.

I keep very little money in "savings." If something drastic happens and I need a $3000 engine or something, I can put it on a credit card until I can get at the money. THe odds of this happening are slim, vs the cost (orrortunity loss) of keeping money in "savings" at low interest rates is definite...and guaranteed to be low rates.