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.

[rkagrawala]

Well, as I said, I only just funded the account in December (though I initiated the process in September, if I recall.) So I've only put in an initial $1300 into the savings account, and had been meaning to transfer much more (up to $10k to stay within IRS guidelines) in order to start the CD. But that had its own complications - their website is a little too secure, as it turns out, and for some reason needed an ATM card PIN that I never received until last week or so. And of course, I haven't done anything with it since then because I'm lazy, and because the exchange rate went from 57 INR to 53-54 INR, so I'd rather wait until it becomes more favorable.

And in any case, I believe they only pay interest either quarterly or annually.

So to answer your question...my return in US Dollars...uh..zero, as it happens. :-(

[rkagrawala]

Alas, the powers that be are forcing us to over-transact our cash into stocks, bonds, ETF's, etc., rather than giving a safe and loving home in which to put it.

I myself have taken advantage of my "Person of Indian Origin" status to chase a higher-yielding savings account and Term Deposit (equivalent to a CD) account with banks in India, approximately 4% and 9% respectively. However this still presents the trauma of currency risk, and "currency timing" (equivalent to market timing) to try to get the best exchange rate going in (strong dollar) and coming out (weak dollar). It was also an excruciatingly slow and complicated application process requiring loads of documentation including copies of my and my parents' passports.

[Allan_Roth]

What was your return in U.S. dollars?