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I've been reading about the basics of personal finance and most resources suggest investments based on benefits that don't seem to exist when interest rates are as low as they are.

For instance: I've read many times over that I should keep my savings in a Money Market Account (MMA) rather than a Savings Account due to the higher returns and potentially lower fees.

When I research MMA's on a site like bankrate.com I see absolutely no difference between:

  • Top Yield Savings Accounts vs. Top Yield MMA's
  • MMA's with no minimum balance vs. MMA's with large ($10+) minimum balances (in terms of interest rates)
  • Fees for Savings Accounts vs. Fees for MMA's

Also, most of the low/no minimum balance MMA's have such high monthly fees that I would have to maintain a large ($10k+) balance just to break even given the extremely low interest rate.

  1. What is it that causes the gap between MMA & Savings Accounts to close?

  2. How should I adjust my investment of shorter-term accessible funds based on these changes?

Specific Context: I am building a fund for the purchase of my first home. Currently it is actually costing me money to maintain this balance in a Savings Account from a national bank. I am set to achieve my goal and purchase in 6 months. I am in a moderately high marginal income tax bracket.

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    Not a proper answer to your question, but you should call your national bank and ask them to waive the fee on your savings. If they won't, move the money into a free account and then close the account. Put the new account at someplace like ING Direct, Ally, etc. The interest isn't much now, but the account will be completely free to keep open -- even if you withdraw most of the money when you purchase your house.
    – bstpierre
    Mar 18, 2011 at 13:50

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I'm going to make an educated guess on #1.

Money markets invest in bonds with a very short time to maturity. An MMA at a bank will be invested in government bonds. Yields on these bonds are really low right now. Thus the yield on that MMA is going to be pretty low.

When you make a deposit in a savings account, the bank uses some of that money to lend back out to its customers in the form of car loans, mortgages, etc. These rates are higher, so the bank is willing to pay you a bit more than the yield MMA so they can use your money for these loans.

For #2, your time window is short, so there aren't really a lot of options for you. Keeping your money where it is will actually cost you money in fees.

You can do as I suggested in my comment above: close the current savings account that's hitting you with fees and open a (free) high yield savings account. You might get 1.1%. If you average $60k in the account over the next 6 months you'll earn $200-250 after taxes.

You didn't ask about CDs, but lately shorter term CDs are paying less than savings accounts. Going out to a year will get you just above the rate on a high yield savings account; two years just a little more. These are outside your goal window, so they aren't an option for you.

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Re #2, consider an account at a credit union rather than a bank or brokerage firm. Whether you choose a savings account or a money market account, you're likely to get an account with lower fees (so it doesn't cost you money), and rates that are typically similar.

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