It was two years ago that I learned the compounding greatness of money market accounts. It was a match made in heaven: I got high interest rates, money that was out of immediate reach but was still accessible, and automatic withdrawals from my checking account so the money was gone before I saw it–or ahem, spent it. The money I saved helped me secure my first apartment while in college and my second apartment in New York.
Now, more than ever, establishing security in an uncertain economy has become crucial. With higher than average interest rates, a money market account can help you do so.
Gone are the days of taking six months to a year just to accrue $1 in interest like with most commercial banks. With rates starting at up to 4% for some money market accounts versus .04% for some savings accounts, it doesn’t take long to notice the cash advantage.
I came across a money market comparison chart on RateCatcher.com, which lists some of the more popular financial institutions and their money market features.
Here’s how the accounts work: You deposit cash into your money market account just like a savings account. You can sign up for an automatic investment plan so the money is taken directly out of your checking account. Interest on the accounts are usually compounded daily and paid monthly.
Here’s what makes compounding so fantastic: The bank is paying you interest on money it’s already paid you interest on!
The drawbacks: You can withdraw your money whenever you want, but if you’ve signed up with an online institution, such as ING Direct, be prepared to wait a few days for the transfer transaction to clear. (In some cases, making your money less readily available can be a good thing).
Some institutions limit the number of withdrawals per month and may charge a fee. But there are plenty of money market accounts that charge absolutely nothing and only ask for a minimum balance of $1.
When shopping around for the best money market account, be sure to take into consideration:
–Fees and service charges on the account
–Minimum balance requirements
–Interest rate paid on your balance
Remember, you don’t need a lot of money to start. If all you have to spare is $20 per pay period, start there. While most experts say you should save at least 10% to 12% of your income, if you can’t start there, start somewhere. Work your way up! Once you see the money accumulating it’ll be easier to save more money.
Renita Burns is the editorial assistant at BlackEnterprise.com.