By John Benjamin: Last updated 08/18/2023
In today’s financial landscape, making informed decisions about where to park your money is vital. Whether you’re saving for a down payment on a home, building an emergency fund, or simply looking to grow your wealth, choosing the right savings option can significantly impact your financial journey.
Two popular choices for savings are Certificates of Deposit (CDs) and Money Market Accounts (MMAs). Both choices have pros and cons; understanding how they work is essential if you plan to use them to help you achieve your financial goals. I will explore CDs and MMAs, their benefits, drawbacks, and use cases in this article.
So, what are CDs? CDs are time deposits issued by banks and credit Unions. More simply, CDs are a type of savings account that offers a fixed interest rate for a set period, called the term. CDs typically have higher interest rates than regular savings accounts, and you cannot withdraw your money early without paying an early withdrawal penalty.
Now as for Money Market accounts? MMAs are a type of savings account that offers check-writing privileges and a higher interest rate than a regular savings account. You can access your money easily and quickly without paying an early withdrawal penalty. In fact, you can withdraw funds any time you would like just like a checking account. Just be sure to check with your bank or Credit Union to see if there is a minimum balance required.
Money Market Account
Benefits
- High-interest rates
- Liquidity (Access To your money)
- FDIC insurance on first 250k
- Check writing option
- Overdraft protection
Drawbacks
- Minimum balance requirements
- Fees
- Changing Interest Rate
- Tax Consequences
- Inflation Risk
CD (Certificate of Deposit)
Benefits
- High-Interest Rates
- Guaranteed interest rates
- FDIC insurance on first 250k
- Term flexibility
- No monthly maintenance fees
Drawbacks
- Early withdrawal penalties
- Term Commitment
- Fees
- Tax Consequences
- Minimum balance requirements
In what situations would it be a good idea to open a CD?
- You have the money you would like to put away.
- You want to get the highest interest rate you can without risking any of the cash to change in value.
- You don’t mind locking your cash up for a specific amount of time. (Usually, the terms are six months up to five years)
In what situations would it be a good idea to set up a Mony Market Account?
- You have some Cash you would like to place in a higher interest-paying account.
- You want access to the funds at almost any time.
- You are building an emergency fund
- Short-term saving goal (Down payment, Special events, Trips)
Saving money is one of the best things you can do for your financial future. It can help you protect yourself from financial emergencies, reach your financial goals, and build wealth. Rest assured you are making a sound financial decision regardless of the account you choose. Having some kind of savings is always a good idea.