A Negotiable Order of Withdrawal (NOW) account is a type of deposit account that allows the account holder to earn interest on deposited funds while still having the ability to write drafts (similar to checks) against the account.
History and Origin
The NOW account concept originated from the need for consumers to earn interest on checking account balances, which traditionally didn’t accrue interest. This type of account came into prominence in the United States in the 1970s following changes in federal regulation which permitted interest payments on certain deposit accounts.
Regulatory Background
The introduction of NOW accounts was historically significant as it circumvented Regulation Q, which prohibited banks from paying interest on demand deposits.
Key Features
- Interest Earnings: Unlike standard checking accounts, NOW accounts accrue interest on the deposited balance.
- Drafts and Withdrawals: Account holders can write drafts which are functionally similar to checks, allowing for flexible withdrawal options.
- Minimum Balance Requirements: Many NOW accounts require maintaining a minimum balance to avoid fees or ensure interest earnings.
- Regulatory Nuances: While similar to savings accounts in terms of interest accrual, NOW accounts are regulated differently under federal law—specifically by federal banking authorities within the United States.
Examples
Consider a financial institution which offers a NOW account with a 0.5% annual interest rate, compared to a checking account with 0%. An individual with a balance of $5,000 in a NOW account could earn $25 in interest over the course of a year, whereas the same balance in a non-interest-bearing checking account would earn no interest.
Special Considerations
Usage and Restrictions
- Draft Limitations: Some financial institutions may limit the number of drafts or withdrawals per month.
- Fees: Failure to maintain the minimum required balance could lead to fees that may offset earned interest.
- FDIC Insurance: These accounts are typically insured by the Federal Deposit Insurance Corporation (FDIC), providing additional security to depositors.
Related Terms
- Demand Deposit Account (DDA): A non-interest-bearing checking account where funds can be withdrawn at any time without any notice.
- Savings Account: A deposit account that typically offers a higher interest rate compared to checking accounts, but with restrictions on the number of withdrawals.
- Money Market Account: A higher interest-bearing account with limited check-writing privileges, often requiring a higher minimum balance.
- Certificate of Deposit (CD): A time deposit with a fixed interest rate and fixed maturity date, which doesn’t offer the immediate liquidity of NOW accounts.
FAQs
What differentiates a NOW account from a typical checking account?
Are there any withdrawal limits on NOW accounts?
Do NOW accounts have FDIC insurance?
Summary
NOW accounts offer a blend of functionalities from both savings and checking accounts. They allow for interest accrual while maintaining the flexibility of easy access to funds through drafts, making them an appealing choice for those wanting to manage their liquid assets effectively.
For further reading, see related financial instruments like Money Market Accounts and Certificates of Deposit, which also serve to balance liquidity and yield.
References
- Federal Reserve Bank, “Understanding Regulation Q and its Impact.”
- FDIC, “A Comprehensive Guide to NOW Accounts.”
- Historical Context of NOW Accounts, Journal of Banking & Finance, Vol. 22.
Understanding NOW accounts enhances one’s ability to manage personal finances, offering a viable option for earning interest while maintaining liquidity.
