Money Market Account Features

Features of Money Market Accounts

Like other bank services, money market savings accounts are subject to government regulations, Individual banks, however, may offer special inducements within prescribed limits. Here is a summary of the main features offered by a typical money market account:

  • Minimum investment. To open and maintain a money market savings account, a minimum of $2,500 is legally required, although some banks require a higher initial investment but thereafter sometimes permit the depositor to reduce the account to $2,500. So long as this minimum remains in the account, money market interest rates will be paid. There is usually no charge for servicing the account.
  • Interest rates. There is no maximum interest limit and rates can either be linked to some other marketplace factor such as the rates being paid by the federal government on its Treasury bills, or can be set at any other level the institution may choose. New interest rates are generally posted every seven days. Some banks pay investors a bonus for maintaining large deposits, for example, an additional 1 percent interest on accounts of $25,000 or more. However, if the average deposit in any month falls below $2,500, interest rates for that period drop to the rate the bank pays on passbook savings — usually 5 -?5.5 percent. Interest on money market savings accounts is generally compounded daily and paid monthly, and an investor who closes an account before the end of the monthly statement cycle generally loses all interest for that month.

Money Market Accounts

Bank Money Market Accounts

As part of the continuing deregulation of banks to allow them to compete more successfully with other financial institutions, federal authorities in late 1982 authorized them to offer money market rates to their customers. This has brought banks into direct competition with private brokerage houses, for whom these funds have been a primary source of income in a period of high inflation and high interest rates. For consumers, the benefit of such funds in recent years has been the high interest rates they have paid. Although these rates are not guaranteed — they traditionally vary with the rates being paid on such federal securities as Treasury bills — in the early 1980’s their yields were, on the average, significantly higher than yields offered by most other forms of investment.

In the competitive atmosphere of late 1982, when bank money market accounts first became available, both commercial and thrift institutions were offering initial interest rates in excess of the rates offered by brokerage houses — inducements to tempt investors to transfer their funds from the brokerage houses to the banks. The high rates were guaranteed for only a short period, often no more than a week, after which they often dropped into line with the rates offered by the investment concerns.

In one respect, at least, banks have a significant advantage over investment houses in attracting investors to their money market accounts: bank deposits are insured by the federal or state agencies while the investment houses can offer no such guarantee of safety. However, it should be noted that as of mid-1983, no investor had lost a penny through money market funds operated by brokerages.

Reinvesting a CD

Reinvesting a Certificate of Deposit

During the life of a certificate of deposit you should discuss with an officer of your bank what you want done with the funds in the account at maturity. If you fail to make provision for taking the cash or reinvesting it, depending on bank policy and the law in your state, one of several things may happen: the cash could be transferred to a passbook account paying lower interest; it could be held by the bank at no interest; it could be reinvested in a new CD for the same time period. Check over your certificates of deposit at regular intervals to remind yourself of their dates of maturity. It is a wise idea to keep a calendar noting their maturity dates a week in advance.

Fluctuating-Rate CD’s

Certificates of Deposit with Fluctuating Rates

Many banks offer special certificates of deposit that pay variable rates of interest. Depending on the bank, they may be called “Premium Rate Certificates” or “Investment Accounts,” or some similar name. Like ordinary CD’s, they are sold for specific lengths of time and interest penalties are exacted for early redemption. However, the interest rates are not fixed but are linked throughout the life of the certificate to some other indicator of the bank’s choosing — the average yield on U.S. Treasury securities, for instance. If that yield rises, so does the interest rate on the certificate; if it falls, the rate of the CD declines as well.

A variable-rate CD is a bit riskier than an ordinary certificate in terms of interest payments, but it does offer the possibility of higher profits if interest rates rise. Like a fixed-rate CD, principal and accumulated interest are guaranteed by the FDIC or FSLIC up to $100,000, or in some states, by a state agency up to an amount determined by state law. Now that banks are permitted to offer money market savings accounts, it is likely that investor interest in fluctuating-rate CD’s will decline. For small investors, however, they offer one major advantage over money market accounts: they usually require a much smaller deposit.

Certificates of Deposit

There are many types of certificates of deposit (CD’s), but all share a common characteristic: the money deposited must remain in the account for a specified time, with severe penalties for early withdrawal. On most CD’s the interest remains the same throughout the life of the certificate. By and large, the longer the life of the certificate the higher the interest rate, except, in some cases, very long term certificates. At one time, stringent regulations governed CD’s in denominations less than $100,000, making them somewhat unattractive investments. In recent years, these regulations have been eased, and the purchase of lower priced CD’s has become a desirable investment for many people.

The main advantage of fixed-interest CD’s is that the interest rate is guaranteed for the life of the certificate, whether or not prevailing rates of interest fall. This, of course, can become a disadvantage if general interest rates rise.

The primary drawback of a CD is that your money is tied up for a specified period. If you decide to withdraw your funds from a CD before its maturity, you must first get the bank’s approval and then be prepared to pay a significant penalty. Under current federal rules, early withdrawal penalties for CD’s issued after October 1, 1983 amount to three months’ loss of interest for certificates maturing in more than a year, and 31 days loss of interest for certificates that mature in less than a year. (Penalties are not exacted if a CD is redeemed early because the owner has died or has been declared legally incompetent.)

A CD owner who is pressed for cash may have an alternative to early redemption. Many banks will accept CD’s as collateral for a loan. The rate charged on such a loan, however, may be so high that it is more economical to cash in the CD and accept the penalty. In other instances, it may be worthwhile to take out a loan to avoid the penalty. The determining factor is the length of time for which the loan is needed.

Read about Fluctuating-Rate CD’s and CD Reinvesting in the following posts.

Investment Accounts

Investment Bank Accounts

In the luxurious world of investments, quite often we hear advises what securities to invest in, but not as often we get advises concerning the types of accounts we should open to start investing. There is a lot of different types of investment accounts, each covering a specific purpose, and new types of accounts are being created to satisfy investors’ demands. What are some of the main types of investment accounts and what purposes they serve to? In the following posts I’m going to review some of the investment accounts that are available currently.

While safety of deposits remains a key element in all types of bank accounts, more and more banks are offering interest rates that match and even exceed those of money market funds promoted by brokerage houses. These high-yield, investment-type accounts have become increasingly available to the average person as the deposit requirements have been lowered during recent years. The primary types are :

  • Certificates of Deposit (also called time deposits)
  • Money Market Savings Accounts
  • Money Market Checking Accounts, sometimes referred to as “Super-NOW” accounts.

Supplemental Bank Services

Supplemental Bank Services Review

Most banks offer depositors, and in some cases non-depositors as well, a variety of convenience services. Here are some typical examples and their relative costs.

  • Safe-deposit boxes. Millions of consumers find these boxes, which are locked and kept in bank vaults, useful for the safekeeping of stock and bond certificates, valuable personal papers, jewelry, sterling silver and other precious objects. Only those whom the renter of the box has designated are allowed entry. (An exception to this rule: law-enforcement officials who have obtained a court order.) The boxes come in a variety of sizes; yearly rentals vary according to size from as little as $10 to as much as $200 or more.
  • Money orders. People who do not have checking accounts but wish to pay their bills with a check-like device have the option of purchasing money orders at most banks. The cost — usually $1 or more — is greater than the normal charge for handling a depositor’s personal check.
  • Certified checks. Often used in business transactions, a certified check is drawn against the depositor’s personal account and then taken to the bank for certification — a guarantee by the bank to the payee that the check will be honored. The bank does this by freezing the amount of the check in the depos-itor’s account until the certified check has cleared. The bank often charges a small fee for this service.
  • Cashier’s Checks. Perhaps the most common financial instrument issued by banks, a cash-ier’s check is one that is drawn on the bank’s own account. Since it is the bank that is liable for payment, a cashier’s check assures the payee that it will be honored.
  • Automatic account transfers. As a service to customers who have both savings and checking accounts, many banks will automatically transfer money from the former to the latter to cover an overdraft. The fee for each transfer is usually about $1. Some banks will also make such a transfer on a depositor’s telephoned request.
  • Copies of documents. If you lose your copy of a bank account statement or other document, your bank will supply you with a duplicate copy — generally at a cost of $1 to $7.
  • Travelers’checks. Some banks issue travelers’ checks without charge to their customers. Other banks charge a fee, for example, either 1 percent of the face value of the travelers’ checks or a flat fee such as $2.50, whichever is greater.

NOW Accounts

Negotiable Order of Withdrawal Checking Accounts

Some years ago, federal regulations were significantly eased to permit banks to pay interest on checking accounts. Both savings and commercial banks offer a variety of NOW (Negotiable Order of Withdrawal) checking accounts, all of which have two things in common. Each pays interest on the funds that are in the account, and each requires a depositor to maintain a minimum balance that is usually greater than the balance needed for maintaining a regular checking account.

As with other types of accounts, the customer should shop around to determine which institution provides the most benefits. Among the several factors to be considered are the following:

  • Free checking. Some NOW accounts involve no monthly or per check fees as long as the minimum balance is maintained.
  • Minimum balances. These vary from bank to bank. As with a regular checking account, a NOW account from Bank A may require that you maintain $300 in your account while Bank B may require $1,000. However, Bank A may demand that the balance never fall below the $300 mark during the calendar month, while Bank B may average the balance for the month and allow full privileges if the average does not drop below $1,000.
  • Penalties. If you fail to maintain the required minimum balance, some banks will levy a per check charge, others a service fee; some will levy both. These fees will usually match those the bank charges its special checking account customers, for example, 20 cents per check. In addition, some banks will charge a service fee linked to the amount on deposit, such as $4 per month when the average monthly balance falls to between $1,000 and $2,000, and $8 per month when the balance falls below $1,000.
  • Interest payments. Most banks will continue to pay interest on the balances in NOW accounts even when those balances have fallen below the level required for free checking. Some banks, however, require that a smaller balance –$100 or $200, for example –be maintained if interest is to be paid.
  • Transfers of funds. Some banks offer automatic transfer of funds from savings to NOW accounts in order to ensure a minimum balance in the latter. This offer may apply only to statement savings accounts.

Special Charges

All banks charge extra fees for stop payment orders on checks, as well as for processing checks that have been returned because of insufficient funds. Since the fees vary widely from bank to bank, inquire about them before opening an account. Some banks charge $5, others $10, others as much as $30 when they must return a check to a depositor because of insufficient funds. Stop payment orders similarly vary in cost — from as little as $4 to as much as $15, depending on the bank.

Special Checking Accounts

Special Checking Accounts

Unlike regular checking accounts these are sometimes called “economy” or “budget” accounts. They require no minimum balance, but the depositor is charged either a fee for each check issued or a monthly maintenance fee, or, in sortie cases, both. This kind of account makes sense for someone who writes few checks or cannot conveniently maintain a minimum balance. Again, shopping around, reading contracts and asking questions can save you money. One bank may charge 20 cents per check and another only 10. But the bank that charges 10 cents may also impose a $1.50 service fee per month, while the bank that charges 20 cents per check may charge no service fee at all. And some banks levy a service fee but make no charge per check.

Checking Accounts

Regular Checking Accounts

This type of?bank accounts requires you to maintain a minimum balance at all times. The amount of the balance varies, depending on the bank, but typically it ranges from $300 to $1,000. In exchange, the bank offers “free” checking: you can write as many checks as you like each month and will not be charged a per-check or a monthly service fee. When you open a regular checking account, you place at the bank’s disposal a certain amount of money it can lend or invest to offset the cost of its services to you. A minimum balance account may be a good arrangement for you if you can afford to maintain the amount, and if you write a fairly large number of checks each month. It may not be a good arrangement if you cannot easily maintain the balance or if you write few checks.

Even if you write a great many checks, it pays to shop around among the banks in your community for the best possible deal, not only in terms of the required minimum balance but also of the way the balance is figured. For example, Bank A may require an average balance of $500 each month: this permits you to have less than the minimum on deposit at various times as long as your average daily balance for the whole month is $500 or more. Bank B, on the other hand, may require a minimum balance of $500 at all times. All other factors being equal, Bank A offers a better arrangement for the consumer.

Another factor to think about is whether the bank you are considering offers automatic transfer privileges for regular checking customers who also maintain passbook or statement savings accounts with the institution. Banks offering this privilege will transfer funds from your savings to your regular checking account whenever the checking balance falls below the minimum, thus maintaining your balance so that you will not have to pay service or per-check charges.

Finally, and most important, you should consider whether a regular checking account makes sense for you at all. If the account requires you to maintain a $500 minimum balance and you write an average of only four checks a month, you are losing the $27.50 in interest per year the money would earn at 5? percent in a passbook savings account. However, if you open a special checking account at the same bank, which demands no minimum balance but charges 15 cents a check, you would spend $7.20 for your 48 checks annually, and you would earn the $27.50 in annual interest on the $500 in the savings account.

If, on the other hand, you write an average of 25 checks per month, a regular checking account makes a great deal of sense, because a per check charge of 15 cents would bring your total yearly outlay to $45, considerably more than the $27.50 you would earn in yearly interest on a $500 savings account.