Savings Accounts Vs. Money Market Deposit Accounts

Savings Accounts Vs. Money Market Deposit Accounts

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There are numerous types of bank accounts casual consumers have, but how many people know the differece. This article explains the difference between checking, savings, NOW, and money market deposit accounts.

Picking the right bank account can be like staring down the counter of a convenience store. I stop in for a quick snack and there are forty different varieties of chocolate bars staring me down: caramel, nougat, peanut, crispy wafer. So many variations of the same thing that I don’t know what they all are anymore. 
 
I get the same feeling when I look at my bank accounts…all five of them, and my other investments. What happened to the basic checking account?  The type where you went to the bank, spoke to a person, and received a toaster.
  
But so many of us out there, at this time, are not necessarily trying to increase our wealth, we’re holding on to what we have its value…its purchasing power. To keep up with inflation, stagflation, or even deflation, consumers need to be educated as to what type of candy bar they are buying – or better yet, what type of account they are really putting their money. Most of us out there have a checking account but how many of us know what a checking account really is?
 
A traditional checking account is a demand account, meaning that the funds are always supposed to be available for withdrawal. This is as clear and dry as the federal rules can be. However, here is the wrench – demand accounts, because of Government Regulation Q, are required to not pay interest. Regulation Q (now migrated to Regulation D) set limits on the interest banks can offer. From the bank’s perspective this makes sense as they are simply acting as a fire proof mattress to store your money for future use. Yet, there are no more toasters to incentivize consumers – and from an early age we are imprinted with the ‘let your money work for you’ philosophy of money management. So, what have banks done?
 
Well, on a very basic sense, they created different candy bars. My online internet bearing checking account is actually a Negotiable Order of Withdrawal (NOW) account. This complies with Regulation Q. This new product allows one to have access to an unlimited amount of checks, but also the benefit of earning interest. 
 
So with two of my accounts explained, I have two types to go. Savings accounts, online and traditional, are very simple. They are places where banks store your money, figure you will not be demanding redemption of it frequently, and use this money to build their reserves. They will loan this money, charge a slightly higher interest, and pay you for letting them use your money. The advent of the virtual or online savings bank account has cut down overhead, as rent and employees are expensive. Because of this lack of expense, interest rates tend to be higher. Some will have regulations stating how frequently one can withdraw and charge fees for additional withdrawals or have stipulations on amount per withdrawal. Some may have minimums, some may have cumbersome websites, but that is for the consumer to decide. Ask questions, call the bank, they all will have customer service.
 
So, with all that said, what exactly is a money market deposit account? This is an account that has high interest rates – as it is not technically a demand account. These rates are higher than NOW accounts because banks make a similar assumption as they do to savings accounts, that the demand for this money will be less frequent than checking accounts so will use these funds to build their reserves. They have check writing abilities – but stipulate how many withdrawals (electronic or check) one may make in a statement cycle, and frequently amounts that may be withdrawn per transaction or statement cycle.
 
All of these accounts serve a purpose. Checking accounts provide immediate access to your funds via an insured institution, but the banks do not pay you for the use of your money. Savings accounts provide a no-risk medium for storing your money and have interest, but do not allow immediate access to the funds. One may have delays in transferring money in and out of the account, and/or be charged fees for access/transfers. NOW accounts provide immediate access to funds, but with limited interest accruing on the funds and are a relatively new vehicle, yet to be tested over time. Money market deposit accounts provide immediate access to your funds, yield savings like interest rates, but have withdrawal restrictions.
 
I was a teller in a previous life, and since then I have not spoken, face-to-face, with a teller more than five times in the last nine years. I may be mildly extreme having so many accounts (not including brokerage accounts), but I’m not that abnormal. I am a day saver – one who constantly shops around for the best savings account rate. While the difference of, say, 0.25%, may not make a huge difference with my meager savings now, someday it will.
 
I personally like the ability to write a check with direct access to my savings (which I keep in a money market). Each person can and should choose their accounts based on their needs, but also on their personal taste and learn which type will compliment the best use and ease of access to their money. Some people like chocolate with coconut and some people like gummy bears.

Bank Savoy Offers 2.60% on Savings Until April 15, 2010

Rate information contained on this page may have changed. Please find latest savings rates.

This offer is available at the branch only and limited to $100,000.

Bank Savoy is a startup bank with only 1 branch and virtually no internet presence.  They do have an internet site which unfortunately gets their name backwards; it is www.banksavoy.com.

The bank has one branch on 52nd and Broadway. 

The occasionally offer good CD rates when I pass buy.  I noticed that now they are offering 2.60% on savings through April 15, 2010 up to $100,000.

I am not sure whether this is available only to NY residents, but you do need to get to the branch.


Savings and CD Rates Steady - 30 Year Mortgage Rate Breaks Above 5%

Rate information contained on this page may have changed. Please find latest savings rates.

Savings and CD rates continue their slow glide to oblivion while 30-year mortgage rates climbed above 5% for the first time since October.

It's been a slow week on the economic news and rate front as bankers head for the hills and take an extended vacation. When I worked at a bank, I remember that the week between Christmas and New Years was slow. The bank was manned by a skeletal crew and for the most part, no significant decisions were made.

On the economic front, the biggest news of the past week has been the steepening of the Treasury Yield Curve to record levels. The yield is considered by many to be the most important economic indicator. My economics teacher in business school harped on its importance. The curve plots the yields of Treasury bills, notes, and bonds. A steep yield curve indicates that short term rates are low and long term rates are higher. A steep yield curve is usually a sign of an impending economic recovery as investors anticipate growth and inflation and believe longer-term rates will go up as demand for capital growns. An inverted yield curve (short term rates are equal to or higher than long-term rates) is a strong sign of a recession, since investors are betting that growth, inflation, and rates are coming down in the future.

Over the last week we experienced the steepest yield curve on record. Usually this would be a strong signal of future growth but there is a wrinkle this time. Massive government borrowing may be distorting the yield curve. Since the government needs to borrow so much money, many investors are anticipating two things: 1) inflation as the government money fuels a recovery; 2) rising Treasury rates as the government has to provide a higher rate to convince investors to soak up so much Treasury demand.

The yield curve is important for savers for several reasons. First, it directly influences the rate you'll receive on money market funds and some longer-term CDs. Money market funds invest in Treasuries and other government and municipal bonds which often take their cue from Treasuries. Second, if you invest in Treasuries, the yield on different maturities is important. Third, it provides some indication of what's going to happen in the future. Right now, the steep yield curve is indicating that rates are going up.. So, as we've said before, it might not be the best time to lock up money in a long-term CD. In 12 months you might be able to get an even better rate. Lastly, Treasury securities serve as benchmarks which help to determine mortgage rates. It's no coincidence that record low yield in Treasuries correspond to record low mortgage rates. If Treasury yields go up, so will mortgage rates.

So, what we're glimpsing in the yield curve is the eventual increase in rates for savers (good news) and the increase in rates for borrowers (not good news).

CD and Savings Rates

As long as the Fed keeps its Fed Fund rate at 0-.25% we're not going to see any significant increase in savings and CD rates. While Treasuries can serve as a forward-looking indicator, savings and most CD rates are pegged to the Fed Funds rate and not from the Treasury bond market. Savings and CD rates continue their slow glide to oblivion, although as we mentioned, rates were pretty unchanged over the past Holiday week. Savings rates stayed steady at 1.57% APY. 1-year CD rates dropped by one basis point from 1.96% to 1.95% APY. This marks the second week in a row that both savings and 1-year CD rates have not dropped or hardly dropped. 3-year CD rate rose 1 basis point to 2.66^% APY and and 5-year rates continued their recent slide, down 3 basis points from 3.21% APY to 3.18% APY.

Like the Treasury yield, BestCashCow has developed its own yield ratio for deposit accounts - the spread between savings rates and 36-month CDs. In some ways, this ratio is purer because it cannot be influenced by government debt, Fed Treasury purchase programs, and other attempts to manipulate rates. As you can see below, the ratio between savings accounts (a short duration deposit account) and 3 year CDs has dropped slightly over the past three weeks. It's still at a very elevated level though, mimicking the Treasury curve. We'll be watching how the ratio develops over the next month to see if it provides any additional clues to the state of the market in 2010.

At this point it's still hard to recommend putting money into anything longer-term than a 12-month CD, especially with rising equity markets and signs that the economy may be coming back to life. Many depositors may be willing to lock money away for 5-years at close to 3%. To me that's just not enough of a return for that period of time. For those worried about interest rate risk, cd laddering may be a good way to smooth out the return you receive from your CD portfolio.

Mortgage Rates

According to Freddie Mac's weekly survey, 30 year mortgage rates rose by 11 basis points from 4.94% to 5.05%. It's the first time since October that the average 30-year mortgage rate has gone above 5%. Data from th BedsCashCow rate tables show that average mortgage rates on 30-year mortgages (the most popular mortgage taken) shot up from 4.95% to 5.193%. This mimics the increase we've seen in longer-term Treasuries. As the Fed ends its purchase of mortgage-backed securities and Treasury securities, we'll probably see rates continue to rise. From all indications, mortgage rates are going up, which is bad for homebuyers and the general housing market.

Frank Nothaft, a Freddie Mac Vice President had this to say about rates going above 5%. "Although interest rates for 30-year fixed-rate mortgages are above 5 percent this week for the first time since the end of October, they are still around 0.5 percentage points below this year’s peak set in mid-June. ARM rates increased by a lesser amount as the market consensus calls for no rate hikes by the Federal Reserve in the immediate future."

You can compare the best mortgage rates in our new mortgage section.