3 reasons to watch money market accounts
February 01, 2012
It's still early, but so far the new year has brought no surge in money market rates. Even so, there is still ample incentive to remain sharp-eyed in search of the best money market rates -- both for your current and future benefit.
Current conditions
The year began with money market rates at a national average of just 0.15 percent, according to the FDIC. With the Federal Reserve having pledged to keep interest rates low at least into the middle of next year, and with global debt worries weighing on the economy, current conditions suggest that it may be a long time before money market rates make a meaningful move upward.
But while the general environment for interest rates isn't very inspiring, there are still some good reasons to pay attention to money market accounts.
3 reasons to keep an eye on money market accounts
- They beat the alternatives. As low as money market rates are, on average they beat savings account rates, as well as short-term CD rates.
- Think dollars, not rates. With the best money market rates reaching no higher than 1 percent, it may not seem like there is much reward in shopping around. However, think of this in relative dollar terms. On $100,000, 0.15 percent would earn you $150 a year in interest. 1 percent would earn you $1,000. Why wouldn't you take the opportunity to earn more than six times the income?
- Relatively speaking, the income benefit is unusually high. The current low rate environment makes the best money market rates especially attractive on a relative basis. After all, when money market rates were at 4 percent on average, you would never have found a rate offering six times as much income.
An eye to the future
Finding the best money market rates can help you start earning more income right away, but it may also set you up for a more productive banking relationship going forward. After all, offering higher money market rates can be an indication of a bank's good health for several reasons:
- Low rates can be a sign of lingering damage from the financial crisis. Banks which are struggling with the aftermath of bad investments or troubled loan portfolios may have no choice but to offer low rates for economic reasons. In other words, low rates could be a sign of financial weakness.
- Low rates may signal current capitalization deficiencies. The FDIC puts a cap (75 basis points above the average) on the interest rates that banks with insufficient capitalization can offer. Thus, a very high interest rate is a sign that a bank doesn't have that problem.
- Higher rates may indicate cost efficiencies. As evidenced by the number of online banks offering relatively high rates, a competitive rate structure may be a sign of cost efficiencies that should help the bank stay strong.
- Higher rates reflect a constructive approach. If nothing else, high rates show that a bank values new customers -- a trait that seems to be the exception rather than the rule these days.
Banking with a thriving institution can mean that you enjoy better service, products, and terms in the years ahead. Higher money market rates can be a sign of that kind of health, and if nothing else, they will at least reward you in the near term.
