Shopping for the Highest Money Market Rates Can Be Well Worth Your Time
September 22, 2009
Time Is Money -- Especially When You Shop for Money Market Rates
You probably know the old saying that it is better to light a candle than to curse the darkness, but did you ever try applying it to money market rates?
Already, you may be cursing the darkness--grumbling that money market rates are so low that they are hardly worth the effort, etc., etc. Well, unless you're extraordinarily wealthy, shopping for money market rates could give you one of the best returns on your time that you've ever had.
Deflation Sweetens Money Market Rates
First of all, deflation continues to make money market rates worth more than meets the eye. How? Well, under normal circumstances, prices are rising, so whatever interest you earn on a money market account would be partially used up just keeping pace with inflation.
Deflation means prices are falling, or to think of it differently, it is negative inflation. When this happens, you not only get the full benefit of any interest you earn in your money market account, but each dollar is actually worth more than it was at the beginning of the year because prices are lower. In other words, even if you kept the same amount of money, you'd have more purchasing power because of deflation.
To put some numbers behind this, suppose you averaged about 1.5% in a $100,000 money market account over the past year. You would have earned $1,500 in interest. At the same time, the Consumer Price Index fell by 2.1% over that same period. Because of this deflation, the $100,000 in principal plus the $1,500 in interest that now make up your money market fund would now have the same purchasing power as $103,677 did a year ago. So, effectively, you've gained 3.677% in purchasing power.
What You Can Do to Increase Money Market Rates
The story can get even better, if you get actively involved. The range between the lowest and highest money market rates is more than 1%. If you shop around and improve your money market rate by 1%, that's an extra $1,000 you'd earn over the course of a year. However, that's not the end of it.
As you accumulate savings, and as your interest compounds over time, the impact of a 1% difference will be magnified. MoneyRates is featuring an "compound rates infographic" which illustrates that under a reasonable retirement savings scenario, a 1% difference in interest rates can result in a $205,000 difference in savings at retirement.
So, is this return worth your time? How long would it take to shop for the highest money market rates and change accounts? One hour, maybe two hours at the most. On a $100,000 account, those two hours could earn you an extra $1,000 this year--that's $500 an hour. If you project that 1% difference out over the retirement savings scenario, it's more like $100,000 an hour.
If you routinely earn $100,000 an hour, then maybe you don't need to shop for the extra 1%. For most people though, that's a very worthwhile return, demonstrating that shopping for money market rates can be time well spent.
Source:
• Bureau of Labor Statistics: http://www.bls.gov/news.release/cpi.nr0.htm
