The best banking setup for most people

A lot of people ask me about where they should park their cash. After doing some research, this is what I recommend.

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Recommended for most: Fidelity CMA

For most people, opening a single Fidelity Cash Management Account (CMA) and using it as your only bank account is the best banking setup.

Automatic money market investing

The core benefit of this account, compared to checking accounts from mainstream banks, is that it automatically invests money into the Fidelity Government Money Market Fund (SPAXX).

A "cash management" account that auto-invests in a money market fund effectively works like a bank account with interest. It's a fair comparison to look at the 7-day SEC yield of a money market fund and the APY interest rate of a checking/savings account.

Fidelity invests your money into SPAXX without any work from you. This particular fund buys government bonds / U.S. treasuries, which are extremely safe and earn a top-notch interest rate. And unlike other methods of buying U.S. treasuries, your money is fully liquid: the money can be withdrawn anytime with zero delay.

"Good bank account" stuff

This account also checks off some unique "good bank account" boxes. This includes

  • ATM reimbursements. You can withdraw cash from any ATM, worldwide, and Fidelity will reimburse you for the ATM fees. Also, there are no foreign transaction fees.
  • Unlimited free wires. Most banks do not do this and, of those that do, they generally have a limit (for example, Schwab does one a quarter).
  • Great service. If you ever need to pick up the phone, Fidelity -- especially in recent years -- has much better service than Vanguard or Schwab.

Downsides

The main downside is the lack of a physical branch. This is mostly relevant for depositing cash.

My main "hack" is to have credit cards at major banks like Chase, Wells Fargo, or US Bank. These banks have branches everywhere and, so long as I have a balance on a card, I can use my cash to make a payment towards a credit card. If you don't deposit cash regularly, this workaround is more than enough for the occasional cash.

If you deposit cash regularly, you can also open a bank account at a major bank. The primary downside here is the need for a minimum balance (for example, $500 at Wells Fargo).

Good things to know

Criteria for a good bank

Here's what you should expect from a good bank (the vast majority of banks do not meet these criteria):

  • Interest rate: You should be earning close to the maximum safe return on cash. This is usually within 0.5% APY of the short-term U.S. treasury rate.
  • Cash anywhere: You should be able to withdraw cash from any ATM, and the bank should reimburse any ATM fees.
  • Fees: You should pay no monthly fees, regardless of your balance. Fees should not be something you think about.
  • Easy to use: The website and mobile app should not be horrible. Also, customer service should be at least tolerable.

What's frustrating is to realize that almost all banks do not offer these traits. You should expect and demand more from the custodian of your money.

Saving accounts aren't necessary anymore

Banks used to offer a higher interest rate for savings accounts in exchange for limiting how often they could be touched. In fact, how often you could withdraw used to be limited by law. But in April 2020, the government removed this restriction. Today, a savings account is just a rebranded checking account.

What's especially frustrating is that many savings accounts are checking accounts with more limitations, and often worse interest rates than some competitive checking accounts.

Setting aside money for emergencies or expenses

If you want to set aside money as emergency cash or delegate some money for particular future expenses, consider using a budgeting tool. This way, where your money physically is stored doesn't matter.

Of course, if you really want to create multiple bank accounts anyways, you can open more accounts. Just don't compromise on the interest rate. (For example, Fidelity lets you open unlimited Cash Management accounts, and transfers between accounts are instant.) To avoid mistakes, I also recommend only doing auto-pay and ACH transfers from your main bank account.

Always earn the maximum interest

What kind of interest should I be getting? An easy technical answer to this question is that you should be earning within 0.5% APY of the short-term U.S. treasury rate. If you're earning less than that, the bank is taking too much for themselves.

For example, in August 2024, the short-term treasury rate is 5.21%. Look for a bank offering 4.7% APY or higher.

The easiest way to ensure you are doing this is to keep your money in a bank account that sweeps your balance into a money market fund. For example, Vanguard and Fidelity do this. This means you are not beholden to interest rate changes by your bank, but rather your money is being directly invested in a fund that buys U.S. treasuries.

Beware of banks that offer higher than the short-term treasury rate (e.g. Robinhood).This is usually a short-term promotion, like an interest rate that will only be offered for three months after opening the account. Or there will be some kind of subscription or payment that would reduce the actual earn rate.

Advanced strategies

Most people can stop reading here.

For high-tax, high-income individuals: Reduce taxes

SPAXX (Fidelity) is a money market fund that invests in U.S. treasuries. But due to some quirks in methodology, its revenue is generally not exempt from state/local taxes. That's a problem for some people in a high-tax bracket of a high-tax state like California.

If this bothers you and you are willing to put in some work, you can invest in a pure Treasury fund instead. This is a mutual fund that only buys U.S. treasuries, and the interest you earn from this fund is exempt from state and local taxes.

For example, you can put your cash into Fidelity's treasury-only money market fund, FDLXX. As of August 2024, the 7-day SEC yield is 4.91%, which is 0.3% lower than SPAXX. But if you're paying a lot in tax, the tax savings will make up for this difference.

Bogleheads, a community of straightforward investors, have a good guide on this strategy, called the "Fidelity one-stop shop". The basic idea is to use Fidelity's "Cash Manager" feature, which can automatically sell your treasuries and move the money to your checking account. This means you can use this fund just like a bank account:

  1. Open a Fidelity Cash Management Account and a Fidelity Brokerage account. (Note: You can open as many of each as you'd like, so I prefer to have a Brokerage account that only holds treasuries.)
  2. Move almost all your money to the Fidelity Brokerage account. Leave only a small amount ($0 is OK) in the Cash Management account.
  3. Invest all the cash in your Fidelity Brokerage account in FDLXX, Fidelity's Treasury-only money market fund.
  4. Set up Fidelity's "Cash Manager" feature to automatically move money from your Cash Management account to your Brokerage account when the balance goes negative.