The banking mess simplified
Have you ever wondered the difference between money market, savings account, checking account or a bank CD? It can be confusing.
Money Market - is a variable rate of return account, that is based on the banks investments in several financial instruments Treasury bills, commercial paper, bankers' acceptances notes , certificates of deposit, federal funds, and short-lived mortgage- and asset-backed securities. And will usually pay a higher rate of return then a saving or Checking account.
Saving account -a basic savings is a variable rate of return account, which the bank can hypothecate (borrow from you and lend to someone else) and is usually where the bank gets it's money to lend for residential and commercial real estate loans. Depends on the bank but usually pays less then a Money Market.
Checking account - usually doesn't pay an interest rate because the money must be callable (withdrawn) at anytime, so the bank must keep a certain amount of cash in the bank at all time, therefore the bank can't invest in higher rate of return products like a savings or Money Market.
Bank certificate of deposit (CD) - is a fixed rate of return usually 1-10 year maturities, longer the maturity the higher returns. The bank invests this money in Real Estate and financial products. Again usually you must keep your money in that bank, as long as you're agreed upon maturity without paying a penalty.
These are basic banking descriptions, banks have now made things complicated by offering a hybrids of products; banks CDs that have no penalty of early withdrawal. Checking accounts that are also Money Market accounts, Saving accounts that are Money Market as well as checking accounts, even Bank CD's that offer check writing access.
Also now there are checking accounts, which are called Reward accounts, that offer very high interest rates (2-4%) but you must meet certain monthly requirements like direct deposit, online statements, and minimum debit card transactions, min bill pay per month, online enrollment requirement, to name just a few. They usually limit the high yield interest to only the first $25,000 to $50,000, the rest of the deposit money only receive a nominal .025%-.05% return
To find out which is right for you or your family, a few things to ask yourself are:
- Do I need quick access to this money?
- How long do I want to keep this money tied up?
- What is the rate of return or yield on the account?
- What are the fees on the account?
- Are there any penalties?
One thing to always make sure is that your bank has FDIC and SPIC insurance. Many banks have failed over the past few years, and long as you are under the insurance coverage, which is $250,000 for cash claims, you will get your money back no matter what happens to the bank.
Also do some research on your bank and find out their rating, which is based on how risky the banks loan accounts are and how much leverage the bank uses to loan money, lower leverage the better.
This a very confusing subject but I hope this helps.