When it comes to savings, it’s hard to know where you’ll get the most bang for your buck. If you’re saving in case of an emergency, then you need your funds to be liquid. If you’re saving for a vacation, you might be more willing to tie up your money. If you’re close to retirement, you may want to avoid risky investments. Certificates of deposit and money market accounts both allow you to get higher rates of interest than a savings account. There are some significant differences between CDs and money market accounts, though.
CDs are timed deposit accounts. Most people open CDs at their local bank or credit union, although you can obtain CDs through brokerage firms as well. CDs have a minimum investment amount and pay a fixed or variable rate of interest. You can buy CDs for a variety of time periods, from a few months to up to five years or more.
CDs are low-risk investments. There’s no risk of loss and it will earn interest. CDs are not liquid, though. If you need to access your money before your CD matures, you can either withdraw it early or take a loan against it. If you withdraw it early, there will be a penalty. You may lose all the interest the CD has earned, and you may lose some of the money you put into the CD as well. If you take a loan against the CD, you will need to repay the loan with interest.
Money Market Accounts
Money market accounts are a type of savings account. You need to deposit more and maintain a higher balance than you do for a regular savings account. In return for keeping more money in the account, banks pay a higher interest rate. Money market accounts are also relatively liquid. You can write checks against your money market account, although the number of checks allowed per month will be limited. You can make up to six outgoing transactions per month out of a money market account. If you exceed that number, your bank will switch your account over to a traditional checking account.
The biggest difference between a CD and a money market account is liquidity. You can easily access money in a money market account. You can also add money to a money market account. You can’t add funds to a CD. You would need to open a new CD if you wanted to make an additional deposit.
Another difference is your interest rate. CDs typically have a higher interest rate than money market accounts. Banks know they’re going to have your money longer, so they can afford to pay you a higher interest rate when you’ve deposited your money into a CD.
Both money markets and CDs have relatively low interest rates when compared to other financial products like stocks and mutual funds. They are secure, though, and insured by the Federal Deposit Insurance Commission. They both pay more in interest than a traditional checking or savings account.
Melinda Hill Sineriz is a freelance writer with over a decade of experience. Her work has appeared on Pocket Sense and Sapling. She specializes in business, personal finance, and career writing. She has worked in insurance sales and financial planning, helping families to manage their money and prepare for the future. Learn more about her and her work at thatmelinda.com.