Since 2008, interest rates for money market accounts have rarely gone above 1.5%. When can we expect interest rates to climb upwards of 2%? Kiplinger is predicting money market rates will rise to 3.5% within the next year, while others are skeptical based on the past year. Not all rates are rising as they depend on the United States Treasury to set the rate. This rate has hardly climbing more than one-half percentage in the past six years.
Understanding the Federal Reserve
The Federal Reserve has a strict monetary policy related to short-term rates. The Fed controls the federal funds rates, which allows banks to determine the interest they can provide to their investors and charge for loans and other accounts. The rate has been low for six years as the economy hasn’t truly recovered from the Great Recession of 2007-2009. Financial experts feel the rates will remain low until unemployment is below 6.5%. With more people in the workforce, people will start spending more money. A stronger economy makes it easier for banks to make money on loans, and allows them to give back larger interest rates for short-term investments like money markets, CDs, and savings accounts. What if you choose to lock your money into a long-term money market or CD? The rates on the CDs and money markets are higher if a person is willing to lock money into an account for a set amount of time.
The Plan for Savers
What should savers do about their money? Which banks are providing the best money market rates? Since rates vary often, we have compiled a list of our favorite banks for savings and MMAs. Based on our history of monitoring the rates, we do not predict a major climb in interest rates. However, some of the long-term savings accounts look like they are going up. Money market funds and long-term CD rates are on the rise. If you are retired, laddering CDs is a great way to make some decent money from interest rates.
The best rates will come from online banks as they have lower overhead expenses. The lower operating costs of online banks allows them to give this money right back to the customer. It is frustrating to see such low rates as retirees were often making 8 to 10 percent in money market funds in the past.
The good news is rates will rise again! The future does look brighter as the rates are slowly creeping up past 1%, and they are expected to slowly climbing over the years.
Investing in CDs or Money Markets?
Buying a CD today is a great idea if you want to set your money aside and let it grow. We have seen some savers lock into a 1% 5-year CD account, only to become frustrated when the rates climb. Currently (Nov. 2014) the highest-paying CD is sitting at 2.25% APY. Taking advantage of the high rate is a great way to ensure your money is going to grow. If you follow a CD laddering approach, you can easily end up with even higher rates when this CD reaches maturity. Comparing CD rates to current money market rates is the best way to find out which one provides the highest return. One other concern with a CD is the fact that your money is locked into the account. With a money market account, you have control over the liquidity of the account. You are limited to 6 withdraws per month. Based on which money market you have, you will need to pay fees if the balance falls below a specific level.
When to Invest in Money Markets
With the rates returning a low amount, you may be wondering when it is the right time to open a new account. Money market accounts make sense in a number of ways including the following:
- High-interest on long-term cash holdings
- Protection from instability
Money market accounts will gain appeal as the interest rates rise again. We have seen several of our savers make the shift from online savings accounts to money market accounts when the rates rise. Some have moved money once in their money market account back to their online savings account where they are earning interest rates of 1%.
How do Money Markets Earn Money?
The money funds are a mutual fund that is invested in short-term debt issued by companies and the government. The average yield on taxable money funds is 0.01% a year for $1 share price. These low yields make money markets undesirable for risky investors. However, investors that want a safe place to stash some cash, money markets are a great solution. The problem we see with interest rates is related to the management of companies. Poor management often causes a company to tack on larger fees when they sell the funds as they need to make up the lack of surplus somewhere. When the interest rates rise, companies will start to lower or waive fees, allowing individuals to earn a decent return from their money market investments.
Determining Your Savings Options
Comparing interest rates on money markets, CD accounts, and online savings accounts is the only way to determine which investment will provide the best return. Each option has a list of pros and cons based on your financial needs. If you want a safe and liquid investment for short-term savings, money markets are the best solution. Individuals seeking a longer-term cash holding, consider using online savings accounts or CD accounts. The most important element when choosing the right savings venue, is to ensure the bank is backed by the FDIC. Some online rates are higher from others, but a large gap shows the bank might not be backed by the FDIC. We thoroughly check each bank and provide information about the history of the bank, and their FDIC status. One way to focus on making money is to compare the interest rates and create a ladder approach to savings. Don’t park your cash in an account with a dismal interest rate. Make the switch to a higher-paying savings account where you can safely grow your nest egg!
Written by Nicole Mark