Money Market Rates and Gifts as Factors in Choosing a Money Market Account

Banks offer different forms of incentives to attract depositors. Some are related to the account itself, such as premium interest rates, but others can be in the form of gifts for starting an account. It's always nice to get a gift, but how much weight should you give this kind of thing when choosing a bank?

Suppose you are shopping for a money market account. An advertisement catches your eye--a local bank is offering a gift certificate for your favorite restaurant to anyone who starts a new money market account this month. It seems like a perfect fit--you had planned to open a money market account anyway, so why not get a free meal out of it? Well, before you go in an fill out the paperwork, you may want to stop and think what that free meal might really be costing you.

Weighing the Value of a Gift

A good starting point with any type of new account incentive is to put it in the right perspective. This means figuring out the financial value of the gift, and then calculating what that represents as a percentage of your account.

Let's say that gift certificate is for $50, and you had planned to make a $5,000 money market deposit. $50 is 1% of $5,000, so you should think of this incentive as being worth 1% of your account. That will make it easier to compare to other factors, such as the money market rates.

Obviously, determining the value of a gift certificate is fairly straightforward, but even if the gift is some type of merchandise, you can easily assign a value to it by finding out what the item would cost if you bought it yourself.

One-Time Offers vs. Ongoing Benefits

Once you've computed the percentage value of a gift, the key thing to remember is that this is a one-time benefit.

For example, a gift worth 1% is not as valuable as getting a money market rate that is 1% higher, if that higher rate is likely to be an ongoing benefit. Since money market rates are subject to change, you may want to ask what a bank's money market rate has been over the past year, so you can see if it has been consistently higher than the competition. That would give you more confidence in considering it an ongoing benefit.

Fee and Money Market Rate Comparisons

Just as you did with the value of the gift, you'd want to convert any account fees into percentage terms. You can then subtract these percentages from the corresponding money market rates.

Like the money market interest rate, fees will be an ongoing rather than a one-time factor, and such factors should be the primary considerations in choosing an account.

Other Considerations

Of course, there are some factors that can't be expressed in percentage terms, such as service, security, and convenience. However, if you use rate and fee comparisons to narrow down the field, you can more easily make sense of these intangible factors. In the end, a new account gift should be thought of as a tie-breaker if all else seems equal -- not the primary factor in your decision, but perhaps the thing that tips the scales between two otherwise attractive alternatives.

Source:

http://www.money-rates.com/AdvancedStrategies/MoneyMarket/Money_Market_Rates_and_Gifts_as_Factors_in_Choosing_a_Money_Market_Account.htm