NOW Account

Negotiable Order of Withdrawal Account (commonly known as a NOW Account) is a type of bank account that cleverly combines the features of a checking and savings account. Think of it as a checking account that pays you interest. Before the 1970s in the United States, regulations like the infamous Regulation Q made it illegal for banks to pay interest on checking accounts. The NOW account was a revolutionary product that found a clever way around this, offering customers “negotiable orders of withdrawal” – a fancy name for checks – that could be drawn against an interest-earning deposit. This innovation forever changed the banking landscape by blurring the lines between spending money and saving money. Today, while many types of interest-bearing checking accounts exist, the NOW account represents the original hybrid, allowing you to earn a return on your everyday cash without locking it away.

At its core, a NOW account functions just like the standard checking account you're already familiar with. You can write checks, use a debit card, set up direct deposits, and pay bills online. The magic happens behind the scenes: the bank calculates interest based on your daily balance and typically deposits it into your account at the end of each month. This simple feature distinguishes it from two traditional account types:

• Traditional Checking Accounts: Also known as demand deposit accounts, these are the workhorses for daily transactions but historically paid zero interest. Your money is safe and accessible, but it's not working for you.
• Traditional Savings Accounts: These accounts pay interest but were historically designed for saving, not spending. They often came with restrictions on the number of withdrawals you could make each month.

A NOW account bridges this gap, offering both transaction flexibility and a modest return, making your cash work a little harder even when it's just sitting there.

For a value investor, cash isn't just idle money; it's a strategic asset. A NOW account is an excellent tool for managing this crucial part of your portfolio.

Great investors, from Warren Buffett to Benjamin Graham, have always emphasized the importance of having “dry powder” – cash on hand ready to deploy when the market offers up a bargain. A NOW account is an ideal home for this cash for several key reasons:

• Safety: In the U.S., balances are typically insured by the FDIC up to $250,000 per depositor, per insured bank. European countries have similar deposit guarantee schemes (DGS). This government backing makes it one of the safest places to hold your money.
• Liquidity: The money is completely liquid. If you spot an undervalued company on a Tuesday morning, you can access your funds instantly to buy its stock. There's no waiting period or penalty for withdrawal.
• Mitigating Cash Drag: Cash that earns zero interest loses purchasing power over time due to inflation. While the interest from a NOW account won't make you rich and may not even beat inflation, it provides some return. This small yield helps offset the 'cash drag' on your portfolio's performance while you wait patiently for the perfect pitch.

While a NOW account is a solid choice, it's wise to know its competitors in the world of cash management.

• Money Market Account (MMA): Often confused with NOW accounts, MMAs typically pay a slightly higher interest rate. However, they may limit you to a certain number of transactions (e.g., six withdrawals or transfers) per month, making them slightly less flexible for daily spending.
• Money Market Fund (MMF): This is not a bank deposit but a type of low-risk mutual fund that invests in short-term debt securities. MMFs can offer higher yields than bank accounts but are not FDIC-insured, meaning they carry a very small amount of risk.
• Treasury Bills (T-bills): These are short-term loans you make to the U.S. government. They are considered one of the safest investments on Earth. However, buying and managing T-bills requires a brokerage account and a little more administrative effort.

Before you open a NOW account, keep a few practical points in mind:

• Minimum Balance Requirements: This is the big one. Many banks require you to maintain a minimum daily or average monthly balance (e.g., $1,500 or more). If your balance dips below this threshold, you could be hit with a monthly maintenance fee that easily erases any interest you've earned. Always read the fine print!
• Low Interest Rates: Don't expect to get rich off the interest. The rates on NOW accounts are typically modest and are often lower than what you could find in a dedicated high-yield savings account or a money market account.
• Eligibility: While less of an issue today, historically, U.S. regulations stipulated that NOW accounts could only be offered to individuals and certain non-profit organizations, excluding for-profit businesses.

Ultimately, a NOW account is a fantastic utility player in your financial toolkit—a safe, liquid, and slightly-better-than-cash place to park your money while you hunt for your next great investment.