A Negotiable Order of Withdrawal (NOW) account is a type of banking account that allows customers to write drafts against money held in the account. These drafts are similar to checks and serve as negotiable instruments.
Characteristics of NOW Accounts
-
Interest-bearing:
- NOW accounts typically pay interest on the collected balances.
-
Check-writing capabilities:
- While similar to checking accounts, NOW accounts offer the added incentive of earning interest.
-
Availability:
- Predominantly offered by banks and savings and loan associations.
Types of NOW Accounts
-
Personal NOW Accounts:
- Designed for individual users, these accounts offer check-writing privileges and interest earnings.
-
Corporate NOW Accounts:
- Available to businesses, these accounts allow companies to earn interest on their operational funds.
Historical Context
The concept of NOW accounts originated in the United States during the late 1970s. They were introduced as a means to circumvent Regulation Q, which previously prohibited banks from paying interest on demand deposits.
Applicability
NOW accounts are suitable for individuals and small businesses who wish to:
- Maintain liquidity of funds.
- Earn interest on their balances.
- Have the convenience of writing checks.
Comparisons with Related Accounts
-
Checking Accounts:
- Traditional checking accounts usually do not pay interest, whereas NOW accounts do.
-
Savings Accounts:
- Savings accounts typically restrict withdrawals and do not offer check-writing capabilities, unlike NOW accounts.
Special Considerations
When choosing a NOW account, customers should consider:
- The interest rate offered.
- Minimum balance requirements.
- Fees associated with account maintenance.
- Limits on the number of withdrawals per month.
Examples
- Individual Use: A NOW account holder can write a check to pay utility bills while earning interest on the remaining balance.
- Business Use: A small business might use a NOW account for petty cash disbursements, benefiting from interest earnings.
Related Terms
- Negotiable Instrument: A written order or unconditional promise to pay a fixed amount of money, transferable by endorsement or delivery.
- Demand Deposit: A bank account from which funds can be withdrawn at any time without advance notice.
FAQs
Q: Can anyone open a NOW account?
A1: NOW accounts are generally available to individuals, sole proprietorships, and certain non-profit organizations. Businesses can also have access under specific conditions.
Q: Are there limits to the number of withdrawals from a NOW account?
A2: While there may be no federal limits, banks may impose their own restrictions on the number of transactions.
Q: What is the difference between a NOW account and an MMA (Money Market Account)?
A3: MMAs often offer higher interest rates but may come with higher minimum balance requirements and limited check-writing capabilities compared to NOW accounts.
Summary
The Negotiable Order of Withdrawal (NOW) account is an important financial tool that bridges the gap between the liquidity of checking accounts and the interest benefits of savings accounts. With its convenience and flexibility, it’s a valuable option for both individuals and businesses seeking to optimize their cash management strategies.
References
- Federal Reserve. Regulation Q.
- Banking institutions’ account terms and conditions documents.
- Historical data on financial regulations and product innovations.
This entry should provide readers with a comprehensive understanding of NOW accounts, their benefits, and considerations for use in personal and business finance.
