If you're looking to park some money in a money market fund, it makes a lot of sense to seek out the best money market rates. But before you actually commit any money, take some time to review the big picture.
The first thing to keep in mind as you look for the best money market rates is that money market accounts are best for short-term savings, not long-term investments. That's especially true today, in our low-interest-rate environment.
As an example, I looked up the prevailing interest rate for a basic money market account at my own bank, and found that for accounts with less than $10,000, the rate was just 0.15%. For those with $100,000 or more, it's still just 0.80%. Imagine that. If you had a whole million dollars in such an account, it would kick out just $8,000 per year! If you had a more typical $5,000 in the account and were earning 0.15%, you'd collect... $7.50 per year. Enough for a sandwich, perhaps.
Small differences add up
That's why it does pay off to find the best money market rates that you can. At sites such as Bankrate.com, for example, you can find the best rates near you, or the best rates nationally -- and there are plenty of financial institutions, such as Internet-based ones, that don't require you to live nearby.
A recent search turned up a 1.01% rate for accounts with at least $1,500 at EverBank, and a 0.85% rate from American Express. With a $5,000 account, you'd receive $50.50 from EverBank, and $42.50 from American Express. It beats the sandwich, at least.
Aim higher and longer
But here's a big problem: Historically, inflation has averaged about 3% annually. So even if you're earning 1% annually in interest, you're losing purchasing power over time. These days, even the best money market rates aren't likely to maintain the value of your investment, much less increase it.
Thus, consider alternatives. Dividend-paying stocks might draw your attention, since plenty of them have been consistently paying shareholders for many years, and frequently with yields above 3%. But be careful. The best of them will keep paying you no matter what the economy or stock market are doing, but at least over short periods, the value of even terrific stocks can sink temporarily. You don't want that to happen right before you need to sell and collect your proceeds. Money that you'll need within the next few years (and even 10 years, if you want to be very conservative and risk-averse) should not be in stocks.
A better compromise might be CDs. One-year CDs recently offered about 1% in yields, while two-year ones ranged up to 1.16% and five-year ones up to 1.6%. Those will likely beat the best money market rates you'll find, but they probably won't keep up with inflation, either. Other options include a variety of bonds, though there are cautions to heed there, as well.
If you're going to invest in a money market account, do seek out the best rates you can find, but if the difference between the best rate and your bank's more convenient rate is just a sandwich or two, perhaps stay put. Just don't park any long-term money in these accounts if you're looking for any kind of growth.
Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of American Express. The Motley Fool recommends American Express. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.