The Best Money Market Rates: Small Differences Matter

Money market accounts may be just what you need if you're looking for safety and a little growth.

If you're looking to park your short-term dollars somewhere, give some thought to money market accounts. Their interest rates are very low these days, but don't let that stop you from seeking the best money market rates you can find. Even small differences in rates can amount to a lot of money.

Let's quickly review what a money market account actually is. Available at banks and other financial institutions, it's a savings vehicle with interest rates that are usually better than those of bank savings accounts. The interest rates offered can sometimes be tiered according to how much money you have in the account. Money market accounts also often feature limited check-writing privileges. There can be some drawbacks, such as a limited number of withdrawals over set periods and required minimum balances higher than those of some other accounts.

Money market accounts are not designed to make you rich, but rather to protect your money and let it grow a bit, too. Their assets are invested in relatively low-risk assets, such as certificates of deposit (CDs), government debt, and corporate bonds. Money market accounts can be protected by the FDIC, just like most bank accounts. Just be sure to check with the bank or institution through which you're investing in one. (And be careful not to confuse money market accounts with money market funds, which are not FDIC-insured and offer inferior rates these days.)

An example
I clicked over to Bank of America's (BAC 3.35%) website to check out their money market account offerings. I was shown a few savings options, such as a savings account that offered an interest rate of 0.01% and a money market account that paid 0.03%. Each sported a minimum deposit of $25. The savings account charged a $5 monthly fee, which would be waived if you met one of certain requirements, such as a minimum daily balance of $300. The money market account charged a $12 monthly fee, which would be waived if you met one of certain requirements, such as a minimum daily balance of $2,500.

Those of greater means can earn even more than the 0.03% interest rate for the basic money market account, because Bank of America has tiered rates. "Preferred Rewards Gold" accounts (for those with a three-month average combined balance in all their qualifying Bank of America accounts of at least $20,000) were paying 0.05%, while "Preferred Rewards Platinum" accounts were paying 0.08% (minimum total balance: $50,000) and "Preferred Rewards Platinum Honors" accounts paid 0.10% (minimum total balance: $100,000).

Money market funds are best used for short-term savings. Image: Flickr user Sheila Sund.

The best money market rates
To find the best money market rates, head over to a site such as Bankrate.com, which lists average rates and the best available rates, nationally and in your state. In late December, its range for money market accounts and savings accounts nationwide was 0.05%-1.05%, with a national average of 0.09%.

The difference between 0.05% and 1.05% is a single percentage point. Let's see just how much of a difference that can make. Here's how a $10,000 investment would grow at both rates over various periods of time:

Clearly, that single percentage point makes a big difference: Even over just a decade, you can earn more than a thousand additional dollars at the higher interest rate.

Of course, interest rates won't stay this low forever, and many expect them to start rising soon. So check out that 1-percentage-point difference applied to higher rates:

Over greater numbers of years, the difference grows much wider, and that could make a big difference in, for example, an emergency fund. You want to have emergency-fund money always available and not losing value, so money market funds (or CDs) could be a sensible option. Thus you would do well to seek the best money market rates you can find in order to maximize your savings.

Still, remember that for any money you want to grow briskly over a period of years or decades, you should focus elsewhere, such as the stock market. Even relatively stable, slow-growing stocks generally grow faster than money market funds, and these days, even modest dividend yields alone will top money markets' interest rates.