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The number of banking products available today compared to the number available just ten years ago is astounding. Online savings accounts and checking accounts have changed the way consumers bank. Now, with the advent of these online accounts, I find myself wondering whether money market accounts are still relevant.
Money Market Accounts Historically
In times past, most financial advisers have touted the money market savings account (often called an MMA) as the way to save money for the short- or medium-term. These accounts have historically had a higher interest rates than standard savings (or passbook savings) and interest-bearing checking accounts.
However, today MMA rates are falling behind online checking and savings account rates.
Banking Has Changed
As interest rates have fallen over the last couple of decades, money market rates have fallen too. Now, PNC online banking and TD online banking consumers are reevaluating whether to use these traditional money market accounts any longer.
These traditional banking consumer have a lot more options available to them now. Should they continue saving money in MMAs or are there better paying options?
In answering whether savers should still consider MMAs, the answer can’t be given as a simple yes or no, since everyone’s situation is different.
If you need a place to hold money that is safe and offers easy access, then yes, an MMA is probably still one of your best choices. However, if you are looking for the best interest rates, then an MMA is no longer a good choice; and hasn’t been for some time.
1st Problem With MMAs
The biggest reason why money market accounts are becoming irrelevant is because online checking accounts provide much better interest than MMAs. Additionally, most online checking accounts have much lower minimum balance requirements.
2nd Problem With MMAs
The trouble with simple savings account options like passbooks or money market savings is their performance versus inflation. Inflation is a sort of hidden tax we pay that comes from the changes in the money supply as the Federal Reserve increases or decreases the amount of money in circulation. Inflation directly affects how much your money is truly worth.
For instance, if the inflation rate is 2%, then a $100 you hold in your hand right now will be worth $98 when you spend it because the inflation rate has lowered the value of those dollars. This is why gold, for instance, has risen in price but not in value. An ounce of gold buys the same things it would buy 200 years ago, only the value of the dollar around it has changed.
The inflation rate for July, 2010, according to the Consumer Price Index, was 1.24%. The best money market savings accounts in July were delivering about 1.34% in interest (1.35% APY). This means your money was only gaining about 0.10% in interest payments.
Factor in the fact that January to May all had inflation rates over 2% and you see that these MMA investments were probably ultimately losing value rather than gaining.
The world changes.
With the availability of more flexible online checking accounts and many other options, many might find that an MMA investment is not profitable enough in comparison. In today’s market, it pays to shop and give due diligence to your money.
Yesterday’s no-brainers are today’s losers.