A Negotiable Order of Withdrawal (NOW) Account is a type of deposit account that allows the account holder to earn interest on the balance. These accounts are a hybrid between a savings account and a checking account, providing the liquidity of a checking account with the interest-earning capabilities of a savings account.
Features of NOW Accounts
Interest Earnings
NOW Accounts typically offer interest on the account balance. The interest rates can vary widely depending on the financial institution and prevailing economic conditions.
Check-Writing Abilities
Account holders can write checks against the balance in a NOW Account, making it more versatile than a traditional savings account.
Minimum Balance Requirements
Most NOW Accounts require a minimum balance to avoid fees and to earn interest. This balance requirement can vary, but it is an essential consideration for potential account holders.
Historical Development of NOW Accounts
Origin and Legislation
The concept of a Negotiable Order of Withdrawal Account was introduced in the 1970s as a response to Federal Reserve regulations that prohibited commercial banks from paying interest on demand deposit accounts (checking accounts). The Garn-St. Germain Depository Institutions Act of 1982 played a significant role in legitimizing NOW Accounts, allowing them to become widely used.
Impact on Banking Practices
The introduction of NOW Accounts marked a significant shift in banking practices, providing consumers with the benefits of earning interest on their deposits while maintaining liquidity.
Applicability and Use Cases
Individual Consumers
NOW Accounts are particularly attractive to individuals who want to earn interest on their money without sacrificing the ability to write checks and make frequent withdrawals.
Small Businesses
Small businesses may also find NOW Accounts beneficial as they offer a way to manage cash flow efficiently while still earning interest on idle funds.
Comparisons with Other Accounts
NOW Accounts vs. Savings Accounts
- Liquidity: Both account types offer interest, but NOW Accounts provide more liquidity through check-writing capabilities.
- Interest Rates: Savings accounts may offer higher interest rates but lack the flexibility for frequent transactions.
NOW Accounts vs. Money Market Accounts
- Accessibility: Money Market Accounts (MMAs) often come with check-writing privileges, similar to NOW Accounts.
- Yield: MMAs might offer higher interest rates but typically require a higher minimum balance.
NOW Accounts vs. Checking Accounts
- Interest Earnings: Traditional checking accounts usually do not earn interest, whereas NOW Accounts do.
- Minimum Balances: Checking accounts may have lower minimum balance requirements compared to NOW Accounts.
Related Terms
- Demand Deposits: Funds deposited in an account that can be withdrawn at any time without prior notice.
- Money Market Deposit Accounts (MMDA): A type of account that offers higher interest rates and limited check-writing abilities.
FAQs
Can I use a NOW Account for my everyday expenses?
Are there any limitations on the number of transactions?
How often is interest calculated on a NOW Account?
Summary
Negotiable Order of Withdrawal (NOW) Accounts offer a blend of liquidity and interest earnings, making them an attractive option for both individuals and small businesses. With a historical backdrop rooted in regulatory changes, NOW Accounts continue to provide a versatile financial solution within the banking sector.
References
- Garn-St. Germain Depository Institutions Act of 1982
- Federal Reserve regulations on demand deposit accounts
- Banking institution policy documents on NOW Accounts
By understanding the features, historical context, and comparisons of NOW Accounts, individuals and businesses can make informed decisions regarding their financial management strategies.
