Money Market Rates Are Better Than You Think
March 26, 2009
The headlines are full of stories about how interest rates are low and staying low. While everyone agrees that this is great news for homebuyers and homeowners who are purchasing a new home or refinancing an existing mortgage, for savers the story is different. It was only 18 months ago that a bank savings account at Countrywide Bank earned over 6%. Now many local banks are paying less than 1% on their bank money market accounts. However, it is highly advisable to stay on top of the yields that your cash is earning and realize bank money market rates are really not that bad.
Money Fund Yields
If you are dismayed by the rates paid by banks on money market accounts, don't forget that mutual fund companies are paying even lower rates on their mutual fund money market funds. Today's yields from Fidelity include:
Fidelity Cash Reserves Fund 0.92%
Fidelity Government Money Market Fund 0.65%
Fidelity Money Market Fund 0.97%
Fidelity U.S. Treasury Money Market Fund 0.08%
In comparison the highest rate on a bank money market account posted on MoneyRates.com is over 3% and another 10 banks with yields of over 2.50% are listed. So the next time you consider the monthly interest paid on your bank money market paltry, remember that you would could be worse off with your money in a mutual fund money market accounts. Yet millions of American park their cash in their mutual fund money market and don't even look at the different options to earn a higher rate of return on their cash.
Real Returns
Money is only good for what it can purchase for you. For example, $1,000 in a savings account paying 5% with inflation over 10% gives you less purchasing power than $1,000 in a savings account paying 2% with inflation only at 1%. The difference between the interest rate paid on an investment and the current rate of inflation is called the "real rate of return". That does not mean we like 2% rates. But is also does not mean we are better off having super-high money market rates if at the same time inflation is very high. If deflation (price decreases) occur in the economy our real of rates of return are even better. Keep this perspective in mind before focusing too much on the low level of bank deposit rates.
Interest is Interest
When interest rates drop below 5% many people lose interest in rate shopping. This is a big mistake. The compounding difference between a 1% rate and a 3% rate over time can be enormous. There is not a way to make today's low rates, but we can say that it is quite a bit sexier than leaving your money unattended and earning close to 0.00%. Ignore the overall level of rates in the market and keep shopping for the best deal.
FDIC Insurance
The FDIC insures deposit accounts up to $250,000 per depositor. If you have concerns about a money market account that you find online, check FDIC.gov to verify details and information about the bank.
