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When I first moved our savings to an online bank (Ally Bank) back in 2013, I was blown away by how much interest we got on our first statement. It was unfathomable to me at the time. It just didn’t make sense that there really wasn’t much difference moving to an online bank and it actually paid so much more.
We’ve been with Ally Bank since then, and I’ve been very happy with everything from their website to their customer service when I’ve needed it. I’ve also been pleased knowing we’ve been getting ridiculously much more in interest than accounts at the big banks (it’s not even in the same ballgame!).
However, I’ve been doing a little more exploring lately to find a way to squeeze a little more money out of our savings account. I dove into other online savings accounts, a unique company called Raisin, and investing in U.S. Treasuries through something like VUSXX at Vanguard.
Here’s the scoop on what I found out and what I decided to do…
Disclosure: Just a reminder, this is not financial advice. I’m just a guy on the internet talking about what I’ve done in my own life. Talk to someone smarter than me (i.e., a financial professional) before blindly following what some random person on the internet is doing with their money.
Stop using savings accounts at the big banks!
If you have your savings at a big bank (like Chase, Bank of America, Wells Fargo, PNC, etc.), take a look at what you’re actually getting on your hard-earned money. It’s likely to be about 0.01%… that’s one one-hundredth of a cent! At 0.01%, a $10,000 balance earns roughly $1 per year before tax – 1 lousy dollar!
Compare that to an online bank that’s likely paying at least 3.00% right now – not three one-hundredths of a cent – 3 percent! On the same $10,000 starting balance, you’d earn about $300 in interest. That’s $300 in “free” money versus the paltry $1 from the crappy big bank. And that’s just on a $10k balance.
If we assume the rates stay constant (which is a big assumption for savings accounts), the effect of compounding becomes:
| Years | 0.01% APY | 3.00% APY | Extra from 3% |
|---|---|---|---|
| 1 | $10,001 | $10,300 | $299 |
| 5 | $10,005 | $11,593 | $1,588 |
| 10 | $10,010 | $13,439 | $3,429 |
| 20 | $10,020 | $18,061 | $8,041 |
| 30 | $10,030 | $24,273 | $14,243 |
The interesting thing is that compounding is almost irrelevant at 0.01%. You’re essentially earning nothing. At 3%, however, the interest starts earning interest itself.
So please, don’t let a big, bad bank have your money for nothing. At the very least, use an online bank for your savings. It’s easy to use, FDIC-insured, and you’ll earn a lot more interest on your money.
That said, after more than 13 years with Ally, I recently started looking at rates a little more. Ally used to be one of the highest-paying of the online banks, but that’s usually not the case anymore. They’re still an awesome online bank, but I started getting a little agitated by other online banks routinely being more generous… step up Ally!
And we all know that loyalty doesn’t pay anymore. To easily compare savings rates, go to this page at Bankrate. Scroll past the sponsored offers and be sure to note if the bank rate you see is the base APY or just a teaser rate.
As I look at this, CIT Bank is currently offering a base APY of 3.75% (plus a 0.35% APY bonus for 6 months). The teaser doesn’t interest me so much, but the base APY is 0.75% more than what Ally has to offer. In our example of $10,000, that’s an additional $75 in interest per year (outside of the teaser).
Is the hassle of changing online banks to gain an extra 0.75% on my savings though? Maybe, but I wasn’t convinced yet.
Raisin… an interesting alternative
The other option I started to consider was Raisin. Raisin’s an interesting contender because they’re not a bank – they’re a fintech company. They partner with smaller regional banks and credit unions to offer top-tier yields. Your money sits in partner accounts protected by FDIC or NCUA insurance, but you manage everything strictly through the single Raisin web portal.
Right now, they have rates (outside of the teaser) of up to 4.00%. Now we’re talking! That’s a full percent higher than what Ally’s offering. And what’s nice is that you can change your back-end bank through them to one with a higher rate as the back-end banks change their rates over time.
As I started talking with Gemini and ChatGPT about this, though, a few of the cons surfaced that made this something more to ponder:
• No Direct ACH Routing Numbers: Raisin accounts don’t come with standard routing and account numbers for external third-party pushes/pulls.
• Single Linked Account Limitation: Raisin limits you to one primary linked external bank account at a time.
• Workflow Friction: Transfers must always be initiated from inside the Raisin platform to or from your single linked external account.
• No Mobile Check Deposit: Raisin does not support check imaging or mobile check deposits.
For my needs, a couple of these made me a little hesitant. On top of that, I was concerned about a little bit of an extra delay when moving money from the account in Raisin to an external account.
For a lot of folks, though, I do think Raisin could be a great solution to really squeeze out the extra juice on their cash. But for me, it wasn’t the solution I was looking for at this time.
The money market fund investing mainly in U.S. Treasuries
As I continued down this rabbit hole of determining if I should bother switching online banks, one of the AI’s mentioned something interesting… the idea of money market funds that are invested primarily in U.S. Treasuries.
Specifically, I was looking at the Vanguard Treasury Money Market Fund (VUSXX). As I’m typing this, VUSXX has a 7-day SEC yield of 3.68%. This is 0.68% higher than the 3.00% I’m getting with Ally Bank. That’s not a huge amount to jump for joy over, but it’s still an increase nonetheless.
But here’s a little twist… because VUSXX invests almost exclusively in U.S. Treasury bills, the interest earned is exempt from state and local income taxes. While we’re living in Ohio (and soon to be North Carolina), the interest from Ally is fully taxable, but Treasury money market fund interest escapes state taxation entirely. I like that!
Here’s what I found interesting about this option, however. Right now, we live off our portfolio, invested almost entirely at Vanguard. At the end of each year, I transfer enough money from Vanguard to Ally to fund our expenses for the following year. That money then sits in the online savings account and gets trickled over to our Schwab checking account throughout the year to pay our bills. Although it’s a bit older, my post The Drawdown on Investments – Our Game Plan digs more into how we do things.
Replacing our online savings account with VUSXX at Vanguard means I can just instantly transfer the money directly between Vanguard accounts at the end of each year. Then the money can trickle over to our Schwab checking account as before. This eliminates an entire financial institution out of the mix (I do love consolidation!).
What’s really cool is that Vanguard allows you to schedule recurring transfers from Vanguard to another financial institution. It’ll automatically sell the amount of VUSXX and then transfer the funds to Schwab for me each month. That’s really some cool stuff!
Although I’ll lose the FDIC coverage that the bank provides, money market funds are investment products backed by SIPC insurance. Treasury bills are backed by the full faith and credit of the U.S. government, the same backing that guarantees FDIC insurance. Overall, not much to worry about in this case.
An interesting facet is that the rate for VUSXX can change daily as Treasury rates change, whereas the interest rate at banks tends to move at a delayed pace. This could work to my advantage (interest rates going up) or be a disadvantage (rates going down), so we’ll call that one a wash right now.
One con is that when I move larger amounts through ACH, I generally use my savings account at Ally instead of our checking account at Schwab. For instance, I make our quarterly estimated tax payments through our Ally account. If we’re lucky enough to get a tax refund at the end of the year, I have that go right to Ally as well. With Vanguard, taxable accounts don’t have ACH routing and account numbers, so the money will need to go through Schwab first. These occurrences don’t happen too often, so this isn’t a major hurdle, but it does add an extra step in most cases.
Another small con is that you can’t do a mobile deposit on checks like you can with Ally Bank. That’s not a big deal though because if I deposit a handful of checks a year, that would be shocker. Plus, I can still do mobile deposit on the checks with Schwab and then just transfer the money to Vanguard as needed.
VUSXX vs. Ally Bank
| Feature | Ally Bank Savings | Vanguard Treasury MMF (VUSXX) |
| Quoted Rate Type | 3.00% APY | 3.68% 7-day SEC Yield |
| State & Local Income Taxes | Fully taxable | 100% Exempt (U.S. Treasury backed) |
| Protection Type | FDIC insurance up to $250k | SIPC coverage + backed by U.S. Treasuries |
| Rate Changes | Set periodically at bank’s discretion | Floats daily with short-term Treasury rates |
| Daily Cutoff Time | Flexible bank hours (usually 7 PM ET) | Strictly 4:00 PM ET (Stock Market close) |
So, all of this got me curious about something that I decided to ask Gemini…
What is the likelihood that VUSXX will always have a higher yield compared to Ally?
And here’s what it said:
The likelihood that VUSXX will outperform Ally Bank is very high in normal and elevated interest rate environments, but it is not guaranteed to be higher 100% of the time.
Understanding how both products generate yield explains why the spread exists and where it can temporarily flip.
Why VUSXX Structurally Outyields Ally Most of the Time
- Direct Market Pass-Through vs. Bank Spread: VUSXX is a mutual fund holding short-term U.S. Treasury bills. Vanguard passes the market rate directly to you minus a razor-thin 0.07% expense ratio. Ally is a commercial bank operating on a net interest margin—it takes deposits, lends them out for auto loans and mortgages, and keeps a profit spread, meaning retail bank savings rates typically lag Treasury yields by 0.50% to 1.00%+.
- Instant Upward Trajectory: When the Federal Reserve raises benchmark interest rates, Treasury yields jump immediately, and VUSXX reflects those increases within days. Banks like Ally tend to raise their retail deposit rates much more slowly.
When Ally Can Match or Beat VUSXX (The Exceptions)
- Near-Zero Interest Rate Regimes (ZIRP): When the Federal Reserve slashes rates to near 0% (as occurred in 2008–2015 and 2020–2021), short-term Treasury yields drop close to 0.00%, driving VUSXX yields down to ~0.01%–0.03%. During those periods, online banks like Ally frequently maintain an APY floor of 0.50% to 0.60% to retain deposits and customer relationships, meaning Ally paid significantly more than Treasury funds.
- Rapid Rate-Cutting Cycles (Lag Effect): When the Fed rapidly cuts interest rates, VUSXX yields drop within 30 to 60 days as underlying Treasuries mature. Ally often adjusts its retail savings rates downward with a slight lag, creating a brief window of a few weeks or months where Ally’s APY may temporarily match or exceed VUSXX.
The After-Tax Advantage
Even in scenarios where Ally’s nominal APY equals VUSXX, VUSXX still retains an advantage on take-home yield:
- State Tax Exemption: VUSXX earnings are exempt from state and local income taxes because the underlying assets are U.S. government debt.
- The Break-Even Threshold: In Ohio or North Carolina (which levies a 3.99% flat income tax), Ally’s nominal APY would need to be roughly 0.15% to 0.20% higher than VUSXX just to break even after state taxes are paid.
As long as benchmark interest rates remain in a normal range (above roughly 1.50%–2.00%), VUSXX will consistently outperform Ally Bank. Only in a zero-interest-rate environment would a bank savings account provide a higher nominal return.
In other words, if rates really start dropping, it’s time to keep an eye on whether it’s time to move some or all of our cash elsewhere.
My current trial of VUSXX
I really like the thought of eliminating the Ally middleman (I love to simplify!) and having our money make more money, so I’m all about this Vanguard VUSXX idea.
That said, I want to test the waters first before going all in. So I transferred over $15k from our Ally savings to my Vanguard brokerage account. I had a cleared-out Vanguard account with $0.02 in it, so I just used that one.
I bought $15,000.02 worth of VUSXX. I made sure that it’s reinvesting the interest earned as well.
Then I set up a transfer test that should have already happened by the time this comes out. In our Ally bank account, I reduced the monthly transfer amount to our Schwab checking account by $500. I then set up a recurring transfer of $500 from my Vanguard account to our Schwab account. That way, I’m not really solely relying on the Vanguard transfer for our monthly expenses money. Hopefully, it sells the VUSXX and transfers the $500 to our checking, but it won’t cause a problem in our workflow if it doesn’t work 100% correctly.
Once I can verify that the flow works the way I’m hoping it does, I’ll move over the rest of our cash from Ally to Vanguard. I’ll then make it so the monthly transfers to our checking account fully take place from my Vanguard account instead of from our Ally account.
This may not be the best solution for everyone as we all have different needs. But I wanted to talk about this for two reasons:
- I can’t imagine many scenarios where anyone should be stashing their on-hand cash in one of the big banks, watching it get eaten up by inflation. If you’re in that situation, please open an online savings account. It only takes a few minutes to do and it’s probably one of the easiest money decisions you can make.
- Different strokes for different folks. Although leveraging VUSXX instead of an online savings account might not be ideal for everyone, sharing is caring. Knowing that it’s an option might be something you weren’t aware of, and maybe it does make sense for you.
Let me know how you store your extra cash and if you’ve considered moving it elsewhere for one reason or another.
UPDATE (8/25/26): I had just finished writing this post and the next morning I was on a bike ride listening to the Clark Howard Podcast (my absolute favorite personal finance podcast). What are the chances that a listener had written in with the exact same concern I had with Ally Bank? And it was eerily funny (yet reassuring) that Wes Moss recommended the same solution I discuss here, except with Schwab’s version of VUSXX. You can hear the question and answer on their YouTube channel here (the link is queued up to the start of the question). You can’t get more timely than that!
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Plan well, take action, and live your best life!
Thanks for reading!!
— Jim
I use Ally similarly, except I also use a checking account at Ally for ACH drafts by certain vendors. Think insurance, city utility, gym. Vendors that if compromised or I want to cancel don’t provide easy access to my main checking. I juice the Ally rate by directly buying 8 or 12 week Treasuries from Treasury direct with Ally funds not needed in the interim. Save the 0.07 Vanguard fee….
That’s a great idea, Kev. I hadn’t thought about using Ally as a “buffer” checking account for vendors that need ACH access but that I don’t want connected to our main checking account. That’s a really smart way to do things.
Direct T-bills via TreasuryDirect are definitely the ultimate way to squeeze out every single basis point. For me, paying Vanguard’s 0.07% expense ratio (which works out to about $35 a year on $50k) ends up being worth the trade-off for several reasons:
1) Daily Liquidity: No need to manage maturity ladders or lock up cash for 8–12 weeks if spending timing shifts.
2) Hands-Off Automation: I can set up an automated monthly “paycheck” transfer that sells the exact dollar amount of VUSXX and pushes it to my checking without touching a button.
3) One less account I need to have in the mix (no Ally and no TreasuryDirect).
4) The TreasuryDirect UI: Avoiding the TreasuryDirect portal interface is easily worth a few dollars a year for peace of mind. 😉
That said, if you don’t mind the TreasuryDirect interface and want maximum optimization, direct T-bills paired with an Ally checking is a truly solid system. That’s what puts the “personal” in personal finance, right? 🙂
Thanks so much for the VUSXX tip! Currently, I’m keeping my emergency fund in Fidelity’s SPRXX with an expense ratio of .42% and 7-day yield 3.69%. But like you I have the bulk of my investments at Vanguard so I think it may be worth switching…
As a lifelong avid cyclist, good luck on the bike ride! Make sure to keep those podcasts tuned low enough that you can hear what’s going on around you while riding.
Nice! That sounds like a pretty straightforward switch since you’re already doing almost the same thing with Fidelity. Hope it works well for you if you got that route!
I was fortunate to be able to pick up a pair of Google Pixel Buds 2a last year for free when I upgraded my phone. They have a feature called transparency mode, which is pretty cool. It basically mics the outside in as well so I can listen to my podcasts and still hear everything around me… game changer!
It’s nice to see that refreshed analysis still arrives at the same conclusion as our’s a year or so ago. Dividends, interest, and our retirement paycheck are get all stored in VUSXX (periodically transferred from the settlement fund since Vanguard doesn’t let you auto transfer dividends and interest to VUSXX… boo Vanguard). Once a month, an automated VUSXX sell occurs and transfers to the outside account where bills are paid from.
Some might say why not use Vanguard’s Cash Plus to manage this whole thing. One reason (and the deal breaker for me) is you can’t transfer from a different Vanguard brokerage account directly to Cash Plus, say if I want to move over fund dividends. It has to go out of Vanguard and back in. However, Cash Plus does allow you to sweep and hold funds in VUSXX while still holding FDIC protection. But, the afore mentioned round trip transfer thing is silly enough to make me avoid using it. There are numerous other well-documented limitations of Cash Plus that make it a no-go as a checking or savings account replacement. I may be considering Fidelity at some point for a better overall cash management experience, but for now, staying within the Vanguard ecosystem is serving us just fine.
Anyway, keep up the great work and best of luck with your bike ride!
Also, those state tax savings from holding VUSXX aren’t automatic, so be sure to account for it when you file your taxes, or make sure your CPA does if you don’t file yourself.
Glad to hear others doing this same thing – that’s always reassuring.
That Cash Plus account is interesting. I did look into it a while back and I can’t remember why it wasn’t a good fit for me, but I could see how that could be useful for some folks.
Thank you so much for the info about needing to handle the VUSXX tax savings manually. I didn’t realize this was a thing, but I talked to m friend Gemini 🙂 and got the scoop on how to handle this. Much appreciated!!
Thanks for the good wishes on the OTET bike ride. Hopefully, it happens soon… I’m ready to do this!
You could invest in SGOV, a short term Treasury ETF instead of VUSXX and get nearly identical rate of return with ~95% the same state tax advantage. Transactions settle faster than a mutual fund and if you bought it through a fintech you bank with like SoFi you could instantly transfer the cash to your bank account after it settles with no limit or waiting period. So effectively getting close to the accessibility of a High-yieid savings account at a modestly higher return the the HYSA unless the fed rate is <= 0.75%
SGOV is a fantastic ETF, and pairing it with a fintech like SoFi is a really clever way to build a high-yield cash hub under one roof!
For my setup, the mutual fund structure of VUSXX won out primarily because of automation. Vanguard allows me to set up an automated monthly withdrawal plan that sells the exact dollar amount of VUSXX and pushes it to my checking account hands-free. With an ETF like SGOV, I’d have to manually log in during market hours every month to place a trade, deal with share price fluctuations/1099-B reporting, and initiate the transfer.
Plus, holding VUSXX right inside my existing Vanguard account lets me eliminate an extra banking institution rather than opening another fintech account.
But for someone who doesn’t mind placing manual trades and already banks at a place like SoFi, SGOV is a killer alternative to an HYSA! Nice one, Jazzy!
I don’t use Vanguard as a main account so I buy VBIL ETF for cash. Still use a HYSA linked to checking for more pressing needs within 6mo. to a yr. I don’t want to be bothered buying individual treasuries either.
That’s a really smart workaround for anyone who doesn’t use Vanguard as their primary brokerage, Scott! And yeah, 100% agree on skipping the hassle of managing individual Treasury auctions!
Interesting Jim… I’ve been with CIT for about 6 years now and they’ve been great, but I’m always watching the rate in case it goes down and I need to consider an alternative
Hi, Dave! Yeah, CIT was the one I had been eyeballing – they seem to usually have better rates than a lot of HYSAs. My workflow trial seems to be going well, but if it flounders for whatever reason, there’s a pretty good chance I’d come join you at CIT. 🙂
Hey Jim, I use a similar setup to you with a Vanguard money market and a separate bank account for bills, deposits, etc. Quick question, I’ve been keeping my Vanguard money market balance intentionally low to keep the MAGI amounts low to help on ACA tax credits. Unfortunately, this does expose me to more risk as I have to sell equity mutual funds more often but for smaller amounts. Does this strategy make sense? This is the first year where I’ve been really managing my MAGI closely. Thanks for your help.
I buy SGOV and use Fidelity since I don’t like dealing with Vanguard. Rates and tax advantages are pretty much parity. Although Vanguard’s customer service and Website is getting slightly better, I’m still sour on them and minimize having to deal with them. I much rather deal with Fidelity.