Is your money working hard for you or the bank? Many people like to have cash available in case of an emergency or they are afraid of money markets, so they deposit their money in saving’s accounts offered by banks. After all, this is the safe way to go and it is federally insured up to $100,000. But is this the best solution for you?
Banks make their money by lending money to its customers, and from the many services and fees they charge each customer. They are allowed to lend as much as 97 percent of their money depending on the regulations set by the Federal Deposit Insurance Commission (FDIC). While you think your money is safely sitting in the bank, they are loaning it out at rates of six percent and higher, and you earn a poor man’s wage or less from the interest rates on your account. The less they give you, the more they make for themselves. Let’s take a look at the interest rates of Bank of America and the Alger Money Market Fund.
Currently, at Bank of America, the interest rate on my savings account is .20 percent. You read that correctly, my rate is just above zero percent. I understand if you want to shake your head and say no, but check your accounts, you may be surprised.
Now, on my Alger Money Market Fund, I averaged 4.22 percent for the year. I searched for a few other mutual funds and I found that Putnam’s Cash Management Trust of America has a one year average of 4.89 percent; Vanguard has a 5.22 percent seven-day average; and Fidelity has several funds ranging from 4.97 to 5.22 percent.
In my Alger account, I have roughly $1,200. In my Bank of America account, I have roughly $2,100. Last month, I received $3.86 in interest on my Alger account compared to .34 cents of interest on my Bank of America account even though the money market account was almost a thousand dollars less. What does this mean in the grand scheme of things? Simply put, I am making eleven times more money in the Alger fund with less money. What would the return look like if I had ten or twenty thousand dollars in that money market account? I am horrible at math, so I will move on.
Earlier today, I read an article that talked about the differences in these accounts. It basically highlighted that savings accounts were easily accessible, safe, and insured; whereas, the money market accounts had limitations, not as accessible, not insured and they had expenses that went to the managers of the fund. This article must have been written by a bank manager. And let me tell you that savings accounts are not without expenses. You have to keep a certain minimum in the account or you have to link it to a checking account to avoid a service fee with some banks. I never really see the fees attached to my fund because it is taken out on the backend. The fund may have actually made over five percent, but because of the expenses, it is currently sitting at 4.22 percent. I will take that any day as opposed to almost zero.
Most money market funds give you check writing abilities, usually above $500 per check. You can also link your checking account to the money market account and have your money wired directly into it. I will probably keep my savings account and run it up to about $2,500 because I use it as an overdraft protection, but after that I am going to deposit more into the money market account for investment purposes.
So, is a money market account for you? Only you can say for sure. You have to do your own due diligence (DD), or research to some, and investigate these types of accounts for yourself. As for me, I am a relatively young person and most of my investments are in Alger mutual funds, 401K plans and stocks, but I am going to build up more of my cash reserves in the Alger Money Market Fund. Now, I’m no rocket scientist, and many of my friends can vouch for that, but $3.89 versus .34 cents is a no-brainer for me. Make your money work harder for you and not the banks.
