There are pros and cons to setting up a CD account or a money market account. The fact is, whether a CD or a money market fund is better for you depends upon what you are trying to accomplish, how much money you're starting with and when you need the money.
Better known as certificates of deposit, CDs are non-negotiable instruments meant to be buy-and-hold investments, so liquidity is limited. CDs can be set up in a variety of time frames, from six months to several years. But be prepared. If you need your money prior to when the CD is scheduled to mature, you will pay a penalty for early withdrawal. Typically, the penalty is a loss of three to six months' worth of interest income.
Money Market Attributes
The main difference between a CD and a money market account is investment liquidity. A money market account is a type of savings account offered by banks and credit unions just like a regular savings account. It usually pays higher interest but often has higher minimum balance requirements ($1,500 to $ 2,500 or more). Similar to a checking account, many money market accounts will let you write up to three checks each month.
During times of economic turmoil and unsettled stock markets, investors of all sizes often move savings into the protection of money market accounts. Banks insure money market accounts up to $250,000 with the Federal Deposit Insurance Corporation (FDIC), while credit unions insure through the National Credit Union Administration (NCUA). Such protection is not available in stocks, bonds or other more risky investments.
The price for the convenience of a money market account — allowing you to readily access funds without penalty — is usually a lower yield on your investment. CDs typically give you a higher yield, but you should be certain you won't need this money for at least two years.
Investing in either a CD or a money market account requires you to be realistic about how much of your funds you might need to access and how soon. CDs lock up your money for longer time frames, while money market accounts only allow three to six withdrawals per month. If you are saving for college and your child is 2, you have time for CDs to work. If you need the money to put braces on your 9-year-old's teeth (or your own) by year's end, a money market would fit your needs better.
- Explain a Certificate of Deposit
- What Are Factors Affecting Individual Choices for Investing Money?
- What Is an Example of a Low-Risk Asset?
- Certificate of Deposit Vs. Savings Account
- How to Buy a CD in an IRA Account
- Differences Between a Savings Account & a Money Market Account
- Money Market Vs. Online Savings
- The Difference in a Money Market and a CD