Banking — Part IV

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Banking — Part IV

Money-Market Deposit Accounts (MMDA)
One of the first and easiest things you can do for your new arrival is to open up a money market account in their name. If at all possible, devote any extra cash you can — no matter how modest. You children will thank you for it someday! Here is how it works…

Money market funds are open-ended mutual funds that invest in short-term debt instruments, usually with maturities of less than a year. The funds generally maintain share value at $1. That means, for example, if you buy 1000 shares today for $1,000, you can expect those shares to be worth $1,000 next week. Your interest, called dividends, is paid in additional shares of the fund worth $1 each. Examples of fund holdings include commercial paper, banker’s acceptances, repos, bank CD’s, government-backed securities, and short-term debt of a credit worthy corporation. Investments held in funds are restricted by the SEC (Securities Exchange Commission) and guidelines do not permit portfolio managers to make risky investments. Money market funds are safer then other mutual funds by nature because they do not buy on margin — they only invest the money that investors have deposited, and do not use borrowed funds.) And, it should be noted that very few money market funds have ever collapsed.

Even though some might not be insured, they all adhere to SEC guidelines. The investments held by the funds usually have a maturity of less than 120 days, which significantly reduces the risk of fluctuating interest rates. Yields among the different funds vary due to differences in portfolio investments, average maturity and fund expenses.

Savings Accounts Savings accounts are another easy, no fuss way to set cash aside and start accumulating interest. There are two basic kinds of savings accounts:

1. Passbook – Transactions in these accounts are posted in the bank’s computer as well as on your own personal passbook.

2. Statement – The more common of the two, statement accounts record transactions in a statement that is mailed to customers either on a monthly or quarterly basis.

In addition to basic savings account, most commercial banks offer other savings instruments like money market deposit accounts and CDs in which it is relatively easy to accumulate a small savings.

HerTip: Don’t forget to assign the baby a social security number. You’ll need it to set up any accounts you may open in his or her name and to claim them as a dependant on your tax return. Many hospitals supply the applications at the maternity ward.

Certificates of Deposits (CDs) CDs are yet another banking instrument designed for savings. They allow you to lock in an interest rate – one that is usually higher than that with a general checking, savings or money market account — for a specific period of time.

Her Tip: All interest from CDs is taxable at the federal, state and local levels in the year it is received, even if the interest is reinvested.

There are three basic types of CDs that you should know about.

• Rising-Rate CDs — Rising-Rate CDs guarantee that if interest rates rise, your CD’s yield will be increased every six months.
• Expandable CDs — Expandable CDs permit you to add more money to an existing CD at the same rate.
• Market Index CDs — Market index CDs are tied to stock market indexes. As usual, you are guaranteed a certain level of return on your CD; but you will also receive a certain percentage of the market appreciation or depreciation over the life of the CD.

Continue to: Part V: Investing