Should I choose a regular savings account, money market savings account, money market mutual fund, or CD?
The short answer to this is that, personally, I believe that money market savings accounts are the best option at the current time. To outline my reasoning, let’s take a look at each product individually.
Regular Savings Accounts
• Are FDIC insured.
• Provide flexibility to add and withdraw money, generally as many times as needed
• Many can even have checks written against their balances.
• Typically offer very low interest rates (example – Bank of America’s current return is 0.1%).
• Locks in your money for a set period of time
• Fees are incurred if you withdraw money before holding period is over
• Typically, CDs have higher minimum balance requirements than other instruments
• Offer a slightly higher national average interest rate of 1.386% with an average minimum deposit of $5,171 (Bank of America’s current 12 month CD interest rate is 0.8%)
• Are FDIC insured
Money Market Mutual Funds
• Not FDIC insured. However, these are considered VERY safe. In fact, no instituation has ever defaulted on a money market mutual fund, to my knoweldge.
• Will have an expense ratio associated with it since it is a mutual fund
• The returns that I have found so far are generally lower. Example – Vanguard’s current 1 year return on its Prime Money Market Fund (symbol – VMMXX – Vanguard Money Market Mutual Funds) is 0.28%.
Money Market Savings Accounts
• Most are FDIC insured.
• No fees or expense ratios.
• Deposits and/or withdraws can be made at any time without penalties.
• High interest rate returns
• Generally do not have check writing ability.
Obviously, as always, you have to pick the correct savings instrument suited to your needs. However, the thing that I would put my money in is the Money Market Savings Account.
To recap, so far, I’ve detailed the pros and cons of different savings instruments. Now, the choice becomes, where do I open the account?
Should I open a money market savings account at an online or brick/mortar bank?
According to the link below, the current average national interest rate for Money Market and Savings Accounts is 0.902%, with a minimum opening balance requirement of $2,108. An initial review of the highest rate search results shows that most of the banks offering the highest rates are online-based. However, let’s dig a little deeper, shall we?
I wonder how my favorite brick and mortar bank, Bank of America, stacks up against this average. By clicking on the link below, it is pretty apparent that it fails this test. The average interest rate you can earn on a money market savings account is 0.15%. Not good at all!
Now, let’s compare my two favorite online banks (Dollarsavingsdirect.com and Ingdirect.com) to see if their rates are higher, lower, or the same.
Dollarsavingsdirect offers a no fees, $1000 minimum to open, 1.40% interest money market savings account that is FDIC insured. ING Direct offers similar features, with a 1.10% interest rate with no minimum balance requirements. Both of these interest rates are significantly higher than what Bank of America offers.
IngDirect (click on the picture below to visit their page)
Note: to receive a $20 bonus for signing up for an INGDirect.com checking account, send me an email at Irwin.email@example.com with your name and email address, and I can send you a link to use to redeem your money.
From this comparison, it looks like online banks are the way to go for your money market savings account needs. This is provided that you are all right with limited-to-no face to face interaction with your online bank.
So, what’s the bottom line here? We have learned that online money market savings accounts typically offer higher returns than the other savings options.
I hope this helps get you on the road to saving your cash more effectively! Please let me know if you have any questions. Also, keep an eye out for a post coming soon about the reasons why you need an emergency cash fund available and the proper amount to place in it.
To view Part 3 of this series, click on the link below.