The MMA Rate Mystery Solved

Of all the Excel models, investing concepts, cash flow theories presented on Dividends4Life, none have been as misunderstood or caused more confusion than the money market account (MMA) rate. I have received many comments and emails inquiring about the rate. Most went something like "4.61%, are you out of your mind? Would you tell me where you found a MMA paying 4.61%?"

Inherently, financial valuations are forward looking. Unfortunately, the only hard data we have is historic, interest rates included. Theoretically, the MMA rate that I use is intended to represent the MMA rate that will be earned over then next 20 years. So how did I come up with the 4.61% that is currently being used?

I started the year at 5.11%, which was the rate that my highest MMA was paying. Then as rates began to fall I averaged the 5.11% with the current rate, limiting the change (plus or minus) to 0.5%, thus 5.11% - 0.5% = 4.61%. Given where rate are, this will not likely change this year.

What appears to be (and actually is) a 2-year MMA rate average that really should be 20-year projected rate really isn't that far off. I validate the rate by comparing it to the 20-year U.S. Treasury rate, which ironically was exactly 4.61% on August 1, 2008.

I don't really expect this will stop the questions and comments about my MMA Rate, but I now I have a post that I can point to to help explain what is happening.

(Photo: gerard79)

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