Save for a rainy day with a high-yield MMA
By Greg McBride • Bankrate.com

Everyone needs a liquid savings account, an emergency fund, or "rainy day" fund, the merits of which are well-founded regardless of economic prosperity or the level of interest rates.

The recommended three to six months of living expenses provides a safety net in the event of an unexpected job loss or sudden car or home repairs. This cash cushion can be a stress reliever, eliminating sleepless nights wondering, "What am I going to do?"

It also saves consumers from reliance on high interest rate debt, such as credit cards, in the event misfortune befalls them.

Many cash consumers also have a sizable cash surplus at the ready, whether for impending expenditures such as the down payment on a home or receipt of a recent bonus or settlement.

But where to best deploy these funds?

With yields on short-term instruments from Treasury bills and money market funds at the lowest point in seven years, and yields on money market deposit accounts offered by the largest institutions at the lowest point since Bankrate began surveying, it may seem that earning an attractive return on this cash stash is impossible. Not so.

In fact, a glance at the 100 Highest Yields list of money market deposit accounts finds yields nearly triple that of what the largest banks offer.

Opening an MMA at one of the high-yielding institutions could net $50 per year in interest for every $1,000 deposited, on average, while opting for the bank across the street would produce less than $20 based on Bankrate.com's national average.

Yields also outpace those of money market mutual funds, while maintaining complete access to funds, and unlike money funds, are FDIC-insured.

As with all money funds and MMAs, the yields are not fixed, and fluctuate with interest rates. However, the advantage of these MMA yields has been sustained through both up and down movements of interest rates.

Whether for an emergency fund or a temporary parking place, the highest-yielding money market accounts eliminate the opportunity cost -- the foregone yield -- of idle funds.

Despite an environment of falling interest rates, high-yield MMAs still provide consumers with a competitive, risk-free rate of return, without sacrificing access to their cash.

Greg McBride is a financial analyst for Bankrate.com.

For advice regarding your specific situation, please e-mail one of Bankrate.com's Q&A experts or visit the Personal Finance Advice channel on Bankrate.com.

-- Posted: May 25, 2001