The math
Where to keep the cash you actually need.
Four places compete for short-term money, and most comparisons rank them by whichever yield was highest the week the article was written. Rates move. The structural differences do not, and one of them is worth up to 61 basis points before you compare a single number.
Why this essay quotes no yields
Short-term rates move weekly. Any yield printed here would be wrong within a month, and an article that ranks options by last month's rate is worse than useless because it looks current.
So this covers what does not change: how each instrument is backed, how it is taxed, how fast you can get your money, and what happens if you need it early. Get the structure right and you can slot today's rates into it yourself in about five minutes.
The four options, structurally
High-yield savings. FDIC insured to the standard limit per depositor per bank. Same-day or next-day access. The rate is variable and the bank can cut it whenever it likes, which they tend to do quietly and faster on the way down than on the way up. Interest is fully taxable, federal and state.
Treasury bills. Backed by the US government directly rather than by an insurance scheme, so there is no coverage limit to manage. Bought at a discount and redeemed at face value, with terms from four weeks to a year. Sellable before maturity on the secondary market at whatever price it fetches. Interest is taxed federally and exempt from state and local income tax.
Money market funds. Not FDIC insured. They are mutual funds, and a government or Treasury-only fund holds essentially the same collateral as a T-bill with same-day liquidity and a small expense ratio. A prime fund holds corporate paper, yields slightly more, and behaves differently in a crisis. The Treasury portion of the income usually keeps the state tax exemption, and the fund tells you what percentage qualifies.
Certificates of deposit. FDIC insured, rate locked for the term, and an early withdrawal penalty if you need the money before it ends. The locked rate is the entire product: it is a bet that rates fall.
The structural edge nobody mentions
Treasury interest is exempt from state and local income tax. Savings account and CD interest is not. That is not a market condition or a promotion. It is federal statute, and a state cannot override it.
Which means comparing a T-bill yield against a savings yield directly is comparing the wrong numbers. The savings account has to clear a higher bar to break even.
What a savings account has to pay to match a T-bill
An illustrative 4% T-bill yield, on a $50,000 balance. The yield is a placeholder to express the gap in dollars, not a quote
- In a state with no income tax
- 4.00%, no difference
- In a high-tax state
- 4.41%
- The gap, in yield
- 41 basis points
- The gap, in dollars
- $205 a year
A savings account advertising a rate 41 basis points above a T-bill is not paying you more in a high-tax state. It is paying you the same and letting your state take the difference.
| State rate | Situation | Savings yield needed | Uplift | On $50,000 |
|---|---|---|---|---|
| 0.00% | no state income tax | 4.00% | 0 bps | $0 |
| 3.00% | a low-tax state | 4.12% | 12 bps | $62 |
| 5.00% | a mid-tax state | 4.21% | 21 bps | $105 |
| 9.30% | a high-tax state | 4.41% | 41 bps | $205 |
| 13.30% | the highest bracket in the highest state | 4.61% | 61 bps | $307 |
The formula is one line. Divide the Treasury yield by one minus your state marginal rate, and that is what a taxable alternative has to beat. If you live somewhere without an income tax, this entire section is worth nothing to you and you can ignore it, which is itself useful to know.
Matching the instrument to the job
Money you might need this week. High-yield savings or a government money market fund. The difference between them is usually small and the liquidity is what you are buying. Do not tie up an emergency fund chasing a few basis points, because the entire point of that money is that it is there on the day you need it.
Money with a known date. A tax bill in April, a down payment in nine months. A T-bill maturing just before you need it removes both the rate risk and the temptation to spend it.
Money you will not touch for a year or more. First ask whether it should be cash at all. Cash loses to inflation reliably, and a multi-year horizon usually belongs in something else. If it genuinely must stay in cash, a CD locks the rate, with the early withdrawal penalty as the price of that certainty.
Two mistakes worth avoiding
Chasing promotional rates. Introductory savings rates expire, and the bank is relying on you not noticing. The yield you actually earn is the average over the whole period, not the one on the advertisement. Moving money three times a year to capture teaser rates is a real hourly wage, and it is usually a bad one.
Holding more cash than the job requires. This is the expensive one and it is not close. Cash is the right tool for money you need soon and the wrong tool for everything else. Optimizing the yield on an oversized cash pile is a rounding error next to the opportunity cost of the pile itself.
Sources and further reading
The tax treatment above comes from the issuer. The arithmetic is our own.
- Tax forms and withholding, TreasuryDirect. States plainly that what you earn from Treasury marketable securities is subject to federal tax but exempt from state and local taxes, covering bill interest specifically. The underlying statute is 31 U.S.C. 3124.
- Treasury bills, TreasuryDirect, for terms, auction schedule and how the discount works.
- Deposit insurance, FDIC, for what is covered, the limits, and how coverage works across account categories.