Money Market Rates May Lead You to Re-Examine Your Savings and Checking Account Combo

Money Market Rates: Calculating the Price of Flexibility

Traditionally, two of the basic tools people have used to manage household finances are a savings account and a checking account. However, depending on how often you access your funds, money market accounts might be a better alternative to the checking and savings combination.

Deciding whether a money market account makes sense for you depends on your banking habits. Often, when people set out to choose a bank account, they focus solely on account characteristics--interest rates, fees, etc.--and do not first consider the way they will use the account. However, it is your usage of the account that will go a long way toward determining which bank product is best for you.

Money Market Account Basics

If a savings account is for accumulating long-term savings, and a checking account is for meeting immediate needs, where does a money market account fit in?

The answer is somewhere in between. A money market account offers more access to your money than a savings account but is usually more restrictive than a checking account (in terms of the number of monthly transactions allowed). As a result, money market rates are generally lower than savings account rates but higher than a basic checking account rate. So, if you have a moderate but not excessive number of regular payments to make, having a money market account may be an alternative to having a savings and a checking account.

Another way to look at this: if you find yourself carrying a large checking account balance to meet sizable but unpredictable expenses, you might do better with a money market account.

Money Market Rates vs. Checking and Savings Account Rates: The Simple Trade-Off

As mentioned, money market rates are usually less than savings account rates, so one consideration in this decision is whether a money market account would pay you more than the combination of a savings account and a checking account.

To start with a simple example, suppose you have $50,000. You keep $40,000 in savings and $10,000 in checking. According to some recent figures on money-rates.com, the average savings account rate was 1.51%. Assuming no interest on your checking account, this means you would earn $604 per year (your $40,000 savings balance at 1.51%).

Alternatively, you could put all $50,000 in a money market account, assuming you have too much activity to put it all in savings, but not so many transactions that monthly money market account rules would be limiting. The average money market account rate on money-rates.com recently was 1.33%. This would earn you $665 in annual interest. Even though the money market rate was lower than the savings account rate, being able to apply it to the entire balance means you could earn more.

Before Choosing Accounts, Other Factors to Consider

The exact math will vary from situation to situation, which is why it is important for you to understand how you will use these accounts before you choose. Another factor is whether you are eligible for a checking account that bears interest. If so, this would make the savings-plus-checking approach more competitive. Conversely, if your checking account charges fees, this would tend to tip the scales in favor of the money market account route.

Source:

Sarah Harlan • Tips on making the most of your savings • Sep 16, 2009 • http://www.14wfie.com • http://www.14wfie.com/global/story.asp?s=11144798

Walter Updegrave • Money market funds vs. Money market accounts • Sep 23, 2009 • http://www.yahoo.com • http://finance.yahoo.com/news/Money-market-funds-vs-Money-hmoney-999603945.html?x=0&.v=3