Money Market returns and the power of compounding
(MoneyWatch) Some say that the power of compounding is the most powerful force in the universe. Well, if not the most powerful, certainly the most gratifying to watch. I'm old enough to remember my passbook savings account magically growing over time. It helped contribute to my frugal ways.
Today, however, one of the best money market funds around, the Vanguard Prime Money Market fund, is yielding 0.01% annually. That's the APY of course. For kicks, I calculated how long it would take for my money to double. Any guesses?
It turns out that if I put $100 in this account today, I'll have $200 in only a bit over 6,931 years, assuming the yield stays steady. Even if science finds a way to extend the span of human life expectancy into millennium rather than decades, I'm guessing inflation would make my $200 essentially worthless. That sounds, as John C. Bogle would say, like the tyranny of compounding rather than the magic.
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As much as I like Vanguard, I'm not stashing my cash there. Sallie Mae Bank has a money market yielding 0.95 percent. If I place my $100 there, it will double in slightly more than 73 years. Or, better yet, Barclays Bank has a savings account yielding a whopping 1.05 percent. Now we're talking doubling my money in a mere 66 years. That's 6,865 years faster than stashing my cash at Vanguard. And my cash is FDIC insured at the banks.
On a serious note, even earning an extra one percent on cash can be meaningful. If, for example, you have $50,000 earning nothing, take a half hour and put it in a "high yield" FDIC or NCUA money market or savings account. Those 30 minutes will make you an extra $500 in only one year. Not exactly magic, but still a pretty good pay rate in my book.
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