Direct deposit to Vanguard MMF?
A few of the brokerages I know, including Vanguard and Fidelity, allows you to direct deposit your paycheck into their money market fund (MMF) automatically. This sounds like a convenient feature to have as the money will be earning market rate interest and is ready for immediate investment.
Recently, I decided to investigate the feasibility of direct depositing my paycheck into a Vanguard MMF. On closer look, I found out that it does not really pay to direct deposit my paycheck into the MMF, especially if the paycheck is credited on Fridays. The reason is as follows.
According to the MMF’s propectus,
For an electronic bank transfer (other than an Automatic Investment Plan purchase): A purchase request received by Vanguard on a business day before 10p.m., Eastern time, will have a trade date of the following business day.
Earning Dividends
You begin earning dividends on the business day following your trade date. When buying money market fund shares through a federal funds wire, however, you can begin earning dividends immediately by making a purchase request by telephone to Vanguard before 10:45a.m., Eastern time (2 p.m., Eastern time, for Vanguard Prime Money Market Fund).
With my paycheck being on Fridays, the trade date on a direct deposit would also be Friday, which means that the money will start earning dividends only starting from Monday. This was separately confirmed by a secure message from Vanguard’s CSR :
Dividend accruals for new purchases begins on the first business day following the trade date. So a purchase made on a Friday would begin earning dividends on Monday.
What this means is that by direct depositing my paycheck into a MMF with Vanguard, I would lose the interest on Friday, Saturday and Sunday compared to the case if the money had instead been deposited into a bank account.
On every $1000 of a paycheck, the additional interest (assuming 5.3% yield before tax) is worth about (3 * 26) days / 365 days * 5.3% * 1000 = $11.33 a year (my paycheck is biweekly). If you are a two-income family, this amount could add up quickly.
Accordingly, I dropped the idea of direct depositing my paycheck into Vanguard’s MMF. Instead, I will put it into GMAC’s savings account and then ACH the money to Vanguard or Fidelity as needed.
The following is the related post I made on the Boglehead’s forum:
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