Introduction
Managing personal and business finances requires choosing the right banking tools. One option available in the United States is a Negotiable Order of Withdrawal (NOW) account. This guide explains what a NOW account is, how it works, and how it compares to other financial products. I will also discuss the advantages, disadvantages, regulations, and practical applications.
Table of Contents
What Is a Negotiable Order of Withdrawal (NOW) Account?
A NOW account is an interest-bearing deposit account offered by banks and credit unions that allows for withdrawals via checks and electronic transfers. Unlike traditional checking accounts, which are available to everyone, NOW accounts have a unique restriction: only individuals, nonprofits, and some government entities can open one.
How Do NOW Accounts Work?
A NOW account operates similarly to a regular checking account but requires account holders to maintain a minimum balance to earn interest. The bank may reserve the right to require seven days’ written notice before a withdrawal, though this is rarely enforced. Interest is typically compounded daily and credited monthly.
Example Calculation of Interest Earned
Assume I open a NOW account with an initial deposit of $5,000. The bank offers an annual interest rate of 1.5%, compounded daily. The formula for compound interest is:
A = P \left(1 + \frac{r}{n}\right)^{nt}where:
- A is the final amount
- P is the initial principal ($5,000)
- r is the annual interest rate (0.015)
- n is the number of times interest is compounded per year (365)
- t is the number of years
After one year:
A = 5000 \left(1 + \frac{0.015}{365}\right)^{365 \times 1} A \approx 5000 \times 1.0151 A \approx 5075.63So, I would earn about $75.63 in interest after one year.
Comparison: NOW Accounts vs. Other Bank Accounts
| Feature | NOW Account | Checking Account | Savings Account |
|---|---|---|---|
| Interest Earnings | Yes | No | Yes |
| Minimum Balance | Often required | Sometimes | Often required |
| Withdrawal Limit | No strict limit | No limit | Limited |
| Check-Writing | Yes | Yes | No |
| Business Use | No (except nonprofits) | Yes | No |
Who Can Open a NOW Account?
Under federal law, businesses (except certain nonprofit organizations) cannot open NOW accounts. This restriction exists because these accounts function similarly to interest-bearing checking accounts but with limitations on withdrawals.
Example Scenario
John, a retired teacher, wants an account where he can earn interest while still writing checks. A NOW account suits his needs because he doesn’t conduct frequent transactions but wants to maximize his savings.
Advantages of NOW Accounts
- Interest Earnings: Funds in a NOW account generate interest, unlike standard checking accounts.
- Check-Writing Privileges: Unlike savings accounts, a NOW account allows check writing.
- FDIC Insurance: Deposits in a NOW account are insured up to $250,000 per depositor.
Disadvantages of NOW Accounts
- Limited Accessibility: Banks may impose minimum balance requirements and withdrawal notice periods.
- Business Restrictions: Businesses (except nonprofits) cannot open a NOW account.
- Lower Interest Rates: Rates are often lower than those of high-yield savings accounts or money market accounts.
Regulatory Environment
NOW accounts originated in response to regulations that once prohibited banks from offering interest-bearing checking accounts. The Banking Act of 1933 barred commercial banks from paying interest on demand deposits. However, in 1980, the Depository Institutions Deregulation and Monetary Control Act permitted NOW accounts, allowing banks to offer interest-bearing accounts with specific withdrawal limitations.
Practical Considerations
Should I Open a NOW Account?
If I primarily use my bank account for transactions and need access to check-writing, a NOW account might not be ideal due to the interest rate restrictions. However, if I maintain a higher balance and want interest earnings without losing liquidity, a NOW account could be beneficial.
Alternatives to NOW Accounts
For higher interest rates, I might consider:
- High-Yield Savings Accounts: Offer better returns but limit monthly withdrawals.
- Money Market Accounts: Provide check-writing privileges and better interest rates.
- Certificate of Deposit (CDs): Offer higher rates but restrict withdrawals until maturity.
Conclusion
A NOW account bridges the gap between checking and savings accounts by offering interest while maintaining liquidity. However, limitations such as minimum balance requirements and business-use restrictions may make it less attractive. Evaluating financial goals and comparing alternative options can help determine if a NOW account is the right choice.
