Bank Money Market Rate

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The bank money market rate is always lower than the interest offered by mutual fund family money market funds.

When money market accounts were created back in the 1970s, they drew a lot of money away from traditional bank savings account. It's hard to realize now, but prior to the origin of money market funds, the main way people could save money was to keep it in a passbook savings account in a bank. There were time deposits such as certificates of deposit, but regular savings accounts were what most people used. That was also the only way to make regular deposits. You can add to certificates of deposit.

The Bank Money Market Rate is No Longer Regulated

The interest the bank could pay you was regulated by the Federal Reserve. Back in the early 1970s it was set at 5 1/2 percent. That sounds high today, but inflation was starting to heat up, and it was anemic compared to average stock dividends and bond interest payments.

So someone got the idea to create a new kind of mutual fund -- one that used the pooled money of shareholders to buy short term loans of different kinds. This gave these shareholders a higher rate of return (even after paying a management expense fee) than bank savings accounts.

It took a while, but gradually word spread about these money market accounts, and they attracted cash away from bank passbook accounts, which made the banks unhappy. But consumers would rather collect market rates of interest rates on their cash rather than what the bank was allowed to give them.

So banks decided to join a movement they couldn't beat. They set up their money market funds and invested in the same kinds of short term loans.

The Bank Money Market Rate is Lower

However, one big difference is that banks could not run them as efficiently. Therefore, the bank money market rate they could pay is never as high as mutual fund money market accounts.

However, they have one advantage. Because these funds are owned by banks, they are covered under the Federal Deposit Insurance Company (FDIC). Currently, that means each individual account in a bank if insured for up to $250,000. If you want to put more than $250,000 into bank money market funds, you should open separate accounts for each $250,000.

However, you should also understand that the law still regulates these accounts also. The bank typically will not allow you to withdraw money from them more than six times in a month.

The other advantage they carry is simply the convenience of being connected with the bank you normally do business with. I considered getting a money market account with Vanguard Prime, but finally just put the money into a money market savings account at my local bank. That means I don't need another bank debit card or another online account. If I need to transfer money from my savings to my checking, I can do so immediately. If I had to wait for Vanguard to send it to my bank, that might take days, or at the least cost me some money.

And at today's super low interest rates, the little additional interest rate I would earn at Vanguard Prime over the bank money market rate would probably not make up for the service charge I'd pay to transfer some to my personal bank account.

Next: High Interest Money Market Accounts -- don't get burned chasing yield.

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