Where To Park It

Where to Park It: HYSA, T-bills, or Money Market?

An emergency fund that earns nothing is a common and unnecessary mistake. Cash sitting in a traditional savings account at 0.01% to 0.50% APY—the rate offered by the nation's largest brick-and-mortar banks—loses purchasing power against inflation year after year while the same money in a competitive account could earn 4% to 5% with identical safety and near-identical accessibility.

The three main vehicles for emergency fund cash—high-yield savings accounts, Treasury bills, and money market funds—each offer competitive rates, FDIC or equivalent safety, and reasonable liquidity. They are not identical, and the differences matter depending on how large your fund is, how quickly you might need the money, and your tax situation.

HIGH-YIELD SAVINGS ACCOUNTS (HYSA)

A high-yield savings account functions identically to a standard savings account but at a much higher interest rate. HYSAs are offered primarily by online banks and credit unions—institutions with lower overhead than traditional branch networks, which they pass through to depositors as higher rates.

As of mid-2024, competitive HYSA rates from institutions like Marcus by Goldman Sachs, Ally, American Express National Bank, SoFi, and others ranged from 4.35% to 5.10% APY. These rates are variable—they follow the federal funds rate and will change as the Fed adjusts monetary policy. When the Fed cuts rates, HYSA yields drop, often within 30 to 60 days.

The primary advantages:

Instant or next-business-day liquidity. Most HYSAs allow transfers to a linked checking account that settle in 1 business day. Some institutions (SoFi, Ally) offer same-day transfers within their ecosystem. For a true emergency, you can access the money quickly without selling anything or waiting for a maturity date.

FDIC insured up to $250,000 per depositor per institution. There is no scenario in which a properly structured HYSA balance is at risk of loss—the federal government guarantees it.

No minimum balance requirements at most institutions. A $2,000 emergency fund and a $60,000 emergency fund earn the same rate at most HYSAs.

The primary limitation: the rate is variable and will decline when the Fed cuts rates. In a falling-rate environment, HYSA yields may decrease faster than you can reallocate to other instruments.

TREASURY BILLS (T-BILLS)

Treasury bills are short-term debt instruments issued by the U.S. federal government with maturities ranging from 4 weeks to 52 weeks. They are sold at a discount to face value and pay face value at maturity. A $10,000 52-week T-bill purchased at a discount rate reflecting 5.2% yield costs approximately $9,506 at purchase and returns $10,000 at maturity.

T-bills can be purchased directly through TreasuryDirect.gov (no fees) or through a brokerage account. On the secondary market through a brokerage, T-bills can be sold before maturity—though the sale price depends on current rates and remaining term.

The primary advantages:

State income tax exemption. Interest on Treasury securities is exempt from state and local income taxes. In high-tax states—California (up to 13.3% marginal rate), New York (up to 10.9%), Oregon (up to 9.9%)—this exemption makes T-bill after-tax yields meaningfully higher than equivalent HYSA rates.

Example: A 5.0% HYSA in California at a 9.3% state marginal rate produces an after-tax yield of approximately 4.54%. A 4.8% T-bill, state-tax exempt, produces approximately 4.80% after-tax—better by 0.26 percentage points despite a lower nominal rate. On $50,000, that's $130 per year in additional after-tax income.

No credit risk beyond the U.S. federal government itself. T-bills are backed by the full faith and credit of the United States—there is no practical scenario in which they fail to pay.

The primary limitations:

Liquidity requires a maturity date or secondary market sale. A 13-week T-bill purchased today matures in 13 weeks. If you need the money in week 4, you must sell on the secondary market, which means accepting the current market price (generally close to face value for short maturities, but not guaranteed to be exact). For emergency fund purposes, this is a minor liquidity impairment—not a serious risk, but not as instantly liquid as a HYSA.

Minimum purchase of $100 and auction timing. T-bills are issued on a rolling schedule (4-week bills auction weekly; 13-week, 26-week, and 52-week bills on varying schedules). This doesn't create a meaningful problem for most savers, but it adds a small layer of planning that HYSAs don't require.

T-bill laddering—purchasing bills of different maturities so one matures each month or each quarter—provides regular liquidity without requiring secondary market sales and is a practical strategy for larger emergency funds.

MONEY MARKET FUNDS

A money market fund is a type of mutual fund that invests in short-term, high-quality debt instruments—Treasury bills, government agency securities, commercial paper, and certificates of deposit. It maintains a stable net asset value (NAV) of $1.00 per share and pays dividends daily.

Government money market funds (the appropriate type for emergency funds) invest exclusively in U.S. government and agency securities. They are not FDIC insured but are considered extremely safe—the SEC imposes strict portfolio quality, maturity, and diversification requirements. There is no history of a government money market fund "breaking the buck" (falling below $1.00 NAV), though a small number of prime money market funds did during the 2008 financial crisis.

As of mid-2024, leading government money market funds including Fidelity Government Money Market (SPAXX), Vanguard Federal Money Market (VMFXX), and Schwab Government Money Market (SNVXX) offered 7-day yields of 4.9% to 5.1%.

The primary advantages:

Same-day or next-day liquidity within a brokerage account. Shares can be sold and proceeds transferred with no waiting for maturity.

Competitive rates that adjust with the market. Like HYSAs, money market fund yields follow the federal funds rate closely.

Partial state tax exemption for government funds. Government money market funds that hold primarily Treasury and agency securities pass through the state tax exemption on that portion of income. For Vanguard Federal Money Market, this percentage has historically been close to 100% because the fund holds primarily Treasury and agency securities—consult the fund's annual report for the exact percentage applicable to your state.

Available inside brokerage accounts. If your emergency fund lives at your brokerage rather than a separate bank, a money market fund keeps it earning competitive rates without requiring transfers to an external account before investing.

The primary limitation: not FDIC insured. Government money market funds are extremely safe but technically carry the risk that the underlying instruments could decline in value—a scenario so unlikely for short-term Treasuries that it is essentially theoretical for most investors. For those who require FDIC coverage specifically (some institutional guidelines require it), money market funds don't qualify.

COMPARING THE THREE: WHICH FITS YOUR SITUATION

HYSA is best for: - Smaller emergency funds (under $20,000) where the tax advantage of T-bills is modest - People who want maximum simplicity—open an account, transfer money, earn interest

- Those who value FDIC protection explicitly and want the cleanest coverage

- Funds that need to be accessed quickly and unpredictably

T-bills are best for: - Larger funds where state tax savings are material - Residents of high state income tax jurisdictions (California, New York, Oregon, New Jersey)

- Those comfortable with a brokerage account and a simple laddering approach

- Situations where the slightly lower liquidity of awaiting maturity is manageable

Money market funds are best for: - Emergency funds held inside a brokerage account as part of a unified financial management approach

- Those who want HYSA-equivalent liquidity with partial state tax advantages

- Funds that fluctuate as income and expenses change—money market funds have no commitment to a maturity date

WHAT NOT TO USE

Regular savings accounts at major retail banks: The largest banks in the U.S.—Chase, Bank of America, Wells Fargo—offer savings rates of 0.01% to 0.50% as of 2024. At these rates, a $30,000 emergency fund earns $3 to $150 per year instead of $1,350 to $1,530 in a competitive account. There is no benefit to these accounts for emergency fund purposes.

CDs without a no-penalty option: Standard certificates of deposit lock money for a fixed term with an early withdrawal penalty. A no-penalty CD (offered by some institutions) provides a fixed rate with the ability to withdraw penalty-free after a short holding period—these can be appropriate, but standard CDs introduce liquidity risk that is inappropriate for an emergency fund.

Investments with market risk: Stocks, bond funds, or balanced portfolios are not emergency funds regardless of their expected returns. An emergency fund is capital you cannot afford to have worth 30% less when you need it. Market-correlated assets fail precisely when other income shocks are most likely to occur—recessions reduce both employment and portfolio values simultaneously.

The emergency fund earns its keep by being available when needed, not by maximizing return. But available and earning 4% to 5% is strictly better than available and earning 0.02%.