Diversifying your investment portfolio means becoming acquainted with various forms of saving and investing, including money market accounts, or MMAs, and certificates of deposit, or CDs. While these two financial instruments share many traits, they also have key differences which can make a significant difference in attaining your short- or long-term financial goals.
In general, a money market account has a similar level of liquidity as a traditional savings account, allowing a limited amount of withdrawals. Some money market accounts even offer check-writing and automated teller machine cards for cash withdrawals or debits. Most CDs do not have this feature and in fact penalize you for early withdrawal. You keep your investment in a CD for a predetermined amount of time and, upon maturity, liquidate the account or roll it over into another investment instrument.
The liquidity of a typical money market account comes at a cost. Most money market accounts, including the high yield ones that require you maintain a higher minimum balance, offer lower interest rates than a CD. However, if you find yourself in a financial environment in which interest rates rise quickly, you may have your money trapped in a long-term CD that has a lower interest rate. In this case, some people liquidate their CDs early and pay a penalty so they can reinvest at a higher rate.
Money Market Funds
When shopping around for the best investment options, you may encounter a whole other type of account, known as a money market fund. These accounts fundamentally differ from both CDs and money market accounts in that they are not FDIC insured, meaning that your risk both your principle and balance. On the up side, these funds are low-risk, typically invested in short-term securities.
Like savings accounts, money market accounts have an interest rate that can change frequently. This fluctuation can be to your benefit if interest rates rise during the course of your investment. If you sense that interest rates may stay the same or fall, certificate of deposit accounts tend to offer a more competitive return on your money and will remain the same regardless of economic conditions. You can also hedge your bets by investing in a tiered CD plan featuring investments of various durations.
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