Negotiable Order of Withdrawal (NOW) accounts are a type of interest-bearing checking account primarily available to individual depositors. They are designed to offer the convenience of a checking account while providing the benefits of interest earnings, akin to a savings account.
Historical Context
Origin
NOW accounts were first introduced in the 1970s by Ronald Haselton of the Consumer Savings Bank in Worcester, Massachusetts. Their introduction was a response to regulations that prohibited interest payments on demand deposit accounts.
Evolution
By the early 1980s, federal regulations changed, allowing such interest-bearing accounts to be more widely available. Today, NOW accounts are a staple in personal banking portfolios.
Types of NOW Accounts
Individual NOW Accounts
Offered to single depositors, these accounts combine the utility of a checking account with the benefit of earning interest.
Joint NOW Accounts
Held between multiple depositors, these accounts offer the same features as individual NOW accounts but include multiple account holders.
Special NOW Accounts
These accounts may come with additional features or higher interest rates for depositors meeting certain criteria, such as higher minimum balances.
Special Considerations
Interest Rates
Interest rates on NOW accounts can vary significantly between financial institutions. While they generally offer lower rates than savings accounts, they provide higher liquidity.
Minimum Balances
To maintain a NOW account, banks often require a minimum balance. Falling below this threshold can trigger fees or disqualification from earning interest.
Federal Regulations
NOW accounts are governed by federal regulations which prohibit a commercial entity from holding these accounts, restricting them to individuals, nonprofits, and certain government entities.
Examples
Example 1: Typical Use
A depositor uses a NOW account for everyday transactions, including paying bills and making purchases, while earning a modest interest on the maintained balance.
Example 2: Higher Balance Benefits
A depositor maintaining a significant balance might be eligible for higher interest rates, making NOW accounts a strategic choice for earning interest on funds while keeping them accessible.
Applicability
Personal Finance
NOW accounts serve those seeking the balance between liquid checking accounts and interest-earning savings accounts. They are ideal for individuals who maintain higher balances in their checking accounts.
Small Nonprofits
Certain small nonprofit organizations may use NOW accounts to manage operational expenses while accruing interest on available funds.
Comparison with Other Accounts
Savings Accounts
Savings accounts typically offer higher interest rates but fewer transaction capabilities compared to NOW accounts.
Regular Checking Accounts
Regular checking accounts often do not provide interest but come with fewer restrictions and lower or no minimum balance requirements.
Related Terms
- Demand Deposit Account (DDA): A non-interest-bearing checking account used for everyday transactions.
- Money Market Account (MMA): A type of savings account with higher interest rates and limited transaction capabilities.
FAQs
Q1: Are NOW accounts the same as savings accounts?
Q2: Do all banks offer NOW accounts?
Q3: Can businesses open NOW accounts?
References
- Federal Reserve. “Interest on Demand Deposits.” Retrieved from Federal Reserve Website
- Consumer Financial Protection Bureau. “Types of Deposit Accounts.” Retrieved from CFPB Website
- Historical Banking Acts. “Legislative Changes in Deposit Account Regulations.” Journal of Banking History, Vol. 15, Issue 3.
Summary
NOW accounts represent a blend of checking and savings features, allowing depositors to earn interest on their balances while maintaining the ability to write checks and make transactions. Originating in response to regulatory constraints, they have become popular among individuals seeking versatile and rewarding banking options. Despite being subject to specific federal regulations, they provide a valuable alternative to traditional checking and savings accounts, especially for those with higher balances.
