Where to Park Cash: T-Bills, Money Market Funds, and HYSAs

The Inattention Tax

Cash is the money you can't afford to risk: the emergency fund the tuition due in March the down payment on the house sitting in an account for eight months. For that job the goal isn't to maximize returns.job. The national average savings account still pays less than half a percent. Major online savings accounts pay about 4 percent. Money market funds pay about 3.5. On a $10,000 emergency fund that shortfall is about $350 a year collected for filling out a form. It might be the purest tax on personal finance inattention

The Three Venues

a high yield savings account or HYSA is a regular bank account typically at an online bank that is FDIC insured up to $250,000 per depositor per bank. As of July 2026 competitive ones pay approximately 4.0 to 4.4 percent annual yield. Strengths are instant access government insurance and zero complexity. Weakness is that the rate is set by the bank's marketing department not by contractand it can be delayed or lowered at any time. That's exactly why the big traditional banks still pay almost nothing to customers who never bother to look

a money market fund It is a mutual fund typically located inside your brokerage account that holds very short-term government and corporate debt. Yields follow those of the Federal Reserve almost mechanically currently between 3.5 and 3.6 percent for large government funds. It is not FDIC insured but a fund created from Treasury and government debt carries near-zero credit risk and the structure has one real advantage over the bank account: the yield automatically adjusts to U.S. rates.market without the need to make purchases. Money that is already deposited at a brokerage often ends up here by default and that default is usually fine

a treasure letter or T-bill is a direct loan to the U.S. government for one year or less purchased through a brokerage or TreasuryDirect and currently has a yield of about 3 for three-month securities. Treasury bills add a feature that the other two lack: Their interest is exempt from state and local income taxes significantly increasing the effective yield for savers in high-tax states. The cost is minor friction. You get a fixed maturity instead of ainstant withdrawal although ETFs containing baskets of Treasury bills restore liquidity the same day at the price of an additional fund wrapper and their own small fee

Where the Yield Actually Comes From

It's helpful to know that these three numbers are not the same type of number even when they are close together on a rate table. A HYSA rate is a decision. A committee or more often an algorithm that tracks competitors sets it and a bank can cut it off the day after you open the account with no warning beyond an email you probably won't read. Online banks can afford to pay about 4 percent because they don't have branches and paying a higher rate is cheaper for them thanpay for a marketing campaign that the rate itself already is

The yield on a money market fund is closer to an average than a decision. The fund has a moving basket of repurchase agreements short Treasury bills and sometimes agency debt all maturing in days or weeks. Each of those instruments trades outside the federal funds rate because arbitrage keeps very short-term rates tightly clustered. As old securities mature and the fund purchases new securities at the current rate the fund's yield quoted as a seven-day figure afterSubtracting the fund's expense ratio simply follows the Fed with a lag measured in days not months. No one in the fund decides to be generous. The plumbing does it automatically

The yield on a Treasury bill comes from an auction not a decision or an average. The Treasury sells bills at a discount to their face value. Suppose for illustrative purposes you pay $991 today for a bill that pays $1,000 in three months. Your yield is the $9 discount divided by the $991 you contributed about 0.91 percent for the quarter and by annualizing that multiply it by four since a year contains fourof those quarters brings it to about 3.63 percent comfortably within the mid-3s that the market has actually been printing. The size of that discount is set by whatever price investors bid in that week's auction which is why a three-month note and a one-year note sold on the same morning can generate markedly different returns. The market is pricing its own guesses about where the Fed is headed on each horizon not just where it is today

Who Bears the Risk, and Who Actually Insures It

All three places are called "safe" but the word works differently in each case and it matters what type of safe you are purchasing

The security of a HYSA comes from the FDIC a federal agency that insures deposits of up to $250,000 per depositor per bank per property category. That insurance is funded by premiums the FDIC charges the banks not a direct outlay from taxpayers and when a small or medium-sized bank fails the insured depositors typically recover within a day or two often because a healthy bank buys the bankrupt's deposits over a weekend. The problem is theceiling.Anything with more than $250,000 in a single bank in a single property category is not insured at all a detail that mattered a lot in 2023 we will talk about that shortly

A money market fund has no FDIC insurance or deposit collateral. What backs it is what the fund actually owns. A government money market fund of the type this article continues to recommend owns Treasury bills repurchase agreements collateralized by Treasury bonds and agency debt so its credit risk is as close to zero as a fund can get without being the government itself. Old prime money market funds instead hold corporate commercial paper and bank debt and that's a significantly larger animal.different.In September 2008 the Primary Reserve Fund a blue-chip fund with commercial paper issued by Lehman Brothers saw its net asset value fall below the traditional peg of $1 after Lehman's collapse an event the industry still calls "breaking the money."Which is why regulators later built gates and fees into the rule book which is its own story below

The security of a Treasury bill is the simplest of the three: It's a direct obligation of the U.S. government "full faith and credit" the closest thing dollar-denominated finance has to a risk-free asset. What you do take on is price risk if you need the cash before maturity and have to sell it on the secondary market where the price moves opposite the returns since you bought it plus a small amount of reinvestment risk when the bill matures and you have to decide what to buy next

The Worked Example: How State Taxes Change the Ranking

This is where the state tax exemption stops being a footnote and starts to change where you actually win. Take a saver with $20,000 to park for a year figures illustrative who is in the 24 percent federal bracket and lives in a state that charges an 8 percent income tax roughly the range that several high-tax states charge

Put that money in a government money market fund that pays call it 3.55 percent. The pre-tax interest for the year is 20,000 times 0.0355 which is equal to $710. Both the federal and state governments tax that interest as ordinary income. The federal tax is 710 times 0.24 or $170.40. The state tax is 710 times0.08 or $56.80. The total tax is $227.20 leaving $482.80 after taxes an after-tax yield of 482.80 divided by 20,000 or 2.41 percent

Now put the same $20,000 in a T-bill that pays 3.6 percent just five basis points more before taxes. The pre-tax interest is 20,000 times 0.036 or $720. Federal taxes still apply: 720 times 0.24 is $172.80. The state tax is zero because interest on T-bills is exempt from state income tax andlocal.The after-tax income is 720 minus 172.80 which is $547.20 for an after-tax yield of 547.20 divided by 20,000 or 2.74 percent

Before taxes Treasuries led the money fund by five basis points practically a rounding error. After taxes in this 8 percent state it leads by 33 basis points almost a third of a percentage point and that gap is due exclusively to the state tax exemption that is doing its job. Run the same trade in a state with no income tax Texas or Florida for example and only the federal tax applies to both places equally reducing the entire gap beforetax rate of 5 basis points at the same 24 percent (5 times 0.76 is 3.8) leaving about four basis points after taxes essentially where you started. The lesson is not that T-bills always win. It's that the state tax exemption is specifically important for the comparison between T-bills and anything else that is fully taxable and is more important the higher the state tax bracket. Run your own numbers before assuming anything

Case Study: Silicon Valley Bank and the Limits of "Safe"

The clearest takeaway from that $250,000 FDIC ceiling in recent memory is Silicon Valley Bank the Santa Clara lender that served much of the venture-backed startup world until March 2023. SVB's deposit base looked nothing like that of a typical retail bank. Its customers were mostly businesses that had operating cash for payroll and expenses and a large majority of those deposits were well above the insurance limit.from the FDIC. The insurance created to protect a retail saver's checking account barely covered the bank's actual depositor base

SVB had also parked a large portion of its deposits in long-duration Treasuries and mortgage-backed securities repurchased when rates were near zero. Perfectly safe assets held to maturity full faith and credit exactly the kind of paper this article has been calling risk-free. But as the Federal Reserve raised rates throughout 2022 and 2023 the market value of those older lower-yielding bonds fell sharply the same mechanical relationship between price and yield that doesWhen SVB announced in early March 2023 that it had sold part of that portfolio at a loss and needed to raise capital the announcement itself was the trigger. Word spread through the venture capital community in hours not days largely through group chats and social media rather than in a line outside a branch and depositors attempted to withdraw from theorder of 40 billion dollars in a single day according to many the fastest bank run in American history. Regulators closed the bank on March 10.First Republic Bank failed in a similar dynamic two months later and was sold to JPMorgan Chase in the largest US bank failure since 2008

Here's the plumbing lesson below the headline. Regulators invoked a systemic risk exception and indemnified even uninsured depositors but that was a discretionary policy choice made over a weekend to prevent contagion not a guarantee written into anyone's account agreement. In the months since cash notably shifted from regional bank deposits to government money market funds and Treasury bills neither of which have a maximum limit of $250,000 of it.way because the "insurance" is structural full faith and credit or a diversified fund among hundreds of issuers rather than a limit per bank. Money fund assets across the industry reportedly rose to record levels the following year. The FDIC limit is not a flaw of the HYSA. It is simply a fact that it needs to be actively managed once the balance exceeds it by distributing cash among banks or transferring the excess to a treasury bill or money fund in thegovernment

Where This Breaks: Gates, Fees, and Settlement Lag

All of the above makes money market funds and T-bills seem to behave exactly like cash on demand. They mostly do. But "mostly" carries weight and a fair counterargument to this whole framework says: know the exceptions before you need them

Start with money market funds. After the Primary Reserve Fund broke the ball in 2008 regulators finally gave money market boards the authority to impose a liquidity fee a charge deducted from money being withdrawn or a bailout gate a temporary freeze on withdrawals that historically lasted up to ten business days if a fund's easily salable assets fell below a set threshold. That authority was most important for primary and municipal funds whichThey hold corporate and bank debt not the government funds this article keeps pointing to. Then March 2020 happened. The COVID stress hit blue-chip institutional funds hard and a strange thing happened: The mere possibility of a door seems to have pushed investors to redeem faster rushing out before it could close possibly making the situation worse rather than better. The Federal Reserve had to open a special line of credit just to stabilize thesector.In the years since the SEC rewrote the rule book again completely eliminating the redemption gates on money market funds and replacing them with a mandatory liquidity fee that applies during periods of heavy withdrawals from institutional preferred and municipal funds specifically. Government money market funds the simple type found in most retail brokerage accounts were largely left out of that fee requirement on the theory that a fund that holds almost nothing but bonds to begin withTreasury and repos don't carry the same execution risk. The bottom line: Check what kind of money market fund your cash is actually in.Governance and premium are not interchangeable and the label matters more than actual performance

Treasury bills break in a quieter way: timing. A bank account or money market fund lets you move money the same day. A Treasury bill doesn't. Buy one at auction and your cash will be on the hook a business day or more before the bill is issued. Hold it until maturity and the proceeds will return to a settlement account not instantly to your checking account usually the next business day. If you need the cash early you'll be selling on the secondary market at whatever price is offered at that time.It makes them the wrong tool for getting money you might need on any given Tuesday which is exactly why this framework keeps them out of the emergency fund and reserves them only for dated goals

Matching Money to Venue

The clean framework is based on time not place. The money needed this month lives in checking accounts. Performance is irrelevant at that scale so don't bother chasing it there. The emergency fund which covers three to six months of expenses belongs to a HYSA or money market fund where access is same day and performance is real. Known future expenses with actual dates license plate a car a down payment Treasury bills that mature on or just before that datelocking in today's rate and eliminating the temptation to touch the money in the middle. And the money you won't touch for five or more years should mostly not be in cash at all as this site's asset allocation article argues because the silent enemy of cash is inflation which will remain above 3 percent in 2026 meaning that even a 4 percent yield is barely a positive real return once taxes take their own bite. Cash is for security and for needsprogrammed. It is not a tool for generating wealth and it was never supposed to be

How I Actually Use This

My own setup is boring on purpose and I mean that as a compliment to myself. The check covers everything I'm spending this month period and I don't think about its performance because thinking about it would be wasting more time than the performance is worth. My emergency fund is in a HYSA at an online bank I moved it there a while ago and have mostly forgotten about it since aside from a rate check I put on my calendar twice a year

The cash that sits inside my brokerage account waiting to be invested or just sitting idle between decisions sits in the account's default government money market fund. I didn't go out and buy that fund. It's the default and for the money I expect to move into in a few weeks the appeal is that I never have to think about it. The performance adjusts itself

Where I actually use T-bills is more limited and this is the part I was wrong about when I started paying attention to all this. I used to think of a T-bill as a slightly better savings account a place to park anything that's sitting idle. It's not. I only buy one now when I have an actual date attached to the money tuition due in a specific month something with a deadline I can mark off. I match the expiration to the date let itsit and don't touch it. More than once I have resisted moving leftover cash to a "juicier" T-bill rate simply because the illiquidity wasn't worth the extra few tenths of a percent of the money I might actually need before maturity. My honest reading is that the state tax angle in the example above is the most underrated part of this whole topic among people my age. Most college students are still not in a high enough bracket in a state withtaxes high enough that the situation changes a lot. That changes quickly once you have a real salary and it's worth developing the habit of checking the exemption early before the dollar amounts are large enough to really matter. None of this is a recommendation about what others should do with their own money. It's simply my own plumbing and the reasoning behind it presented so that you can decide whether the same reasoning applies to yours

The One Afternoon Fix

The execution is deliberately boring. Open an online HYSA at an FDIC-insured bank. Link it to verification. Automate the emergency fund into it. Transfer brokerage cash to the default government money market fund and leave it alone. Check the rate twice a year against the current Fed range and if your bank has fallen far below the leaders moving takes a few minutes. Banks are counting on you not to. That's all the skill andIt pays a few hundred dollars an hour for the one afternoon required probably the best salary a college student will earn all year

The Bottom Line

In 2026 cash will be profitable again: about 3.5 percent at market rates and about 4 percent at the promotional rates that banks use to buy their deposits. But only for savers who place it deliberately. HYSAs provide instant insured access. Money market funds offer an automatic market return without the need for purchases. T-bills provide date certainty and a real estate tax advantage once their category is high enough for them.amount.Know who bears the risk on each: the FDIC and its $250,000 cap behind the bank account the fund's own holdings behind the money market fund the federal government itself behind the bill.Know where each really breaks: a bank run can exceed even what the FDIC insurance was created to handle as SVB demonstrated in 2023 a prime money fund can withstand gates and fees that a government fund cannotsupports and a Treasury bill exchanges liquidity on the same day for a fixed rate. None of that changes the basic math. Nothing belongs to cash in the long term and the banks' entire deposit business model still depends on their lack of attention. Refusing to fund it