When it comes to investing your money, there are countless options to choose from. CDs (Certificates of Deposit) and money market accounts (MMAs) tend to be two popular options people lean towards. Both options are often compared to each other and may seem similar, but which one is the right choice for you?
While both options are federally insured and offer potential benefits for growing your money, it’s crucial to understand the nuances before making an informed decision. This blog post will take a look at both the pros and cons to both CDs and money market accounts so you can choose what’s best for you.
CDs (Certificates of Deposit)
CDs are a type of savings account where you deposit a set amount of money for a fixed amount of time. The terms can range anywhere from a few months to several years, and interest rates are typically higher than a standard savings account.
Benefits of CDs
One of the primary benefits of CDs is their predictability. They provide a fixed rate of interest that remains unaffected by fluctuations in market rates. You can rely on a consistent return since you know that rates typically won’t change for the duration of the term.
CDs are also insured by the FDIC which provides a layer of security, making them a low-risk investment option. These accounts work well for those looking to invest long-term investments because investors lock in a particular rate of interest for the entire term length. In exchange for committing your money into CD investments, CDs usually have higher interest rates than traditional and high yield-savings accounts.
Downsides of Certificates of Deposit
One of the negatives about CDs is that your money is locked in for the duration of the term. Withdrawing money early may result in some sort of penalty. Another thing to consider is that the interest you earn in a CD can be taxed. This will wind up lowering your total ROI when the certificate of deposit matures.
While it can be a positive to some, a drawback of CDs is that the interest rate is fixed. Should interest rates rise when your money is locked in the CD, you could miss on opportunities to earn more money. Lastly, money can only be moved when your CD term is finished.
Money Market Accounts
MMAs are a type of savings account that typically offer a higher interest rate than a standard savings account, but less than a CD. Unlike CDs, your money isn’t locked in for a fixed amount of time and you can make withdrawals at any time. MMAs also offer check-writing privileges, which allows you to access your funds more easily.
Benefits of MMAs
As already mentioned, one pro of money market accounts is that they are FDIC insured. If the bank you set your account up with should fail, your money is protected up to $250,000. MMAs are also a very flexible option for investors and you don’t get penalized for accessing your funds.
Another advantage of MMA is the interest rates aren't set in stone so you can benefit from an increase in interest rates over time. Having said that, there isn’t a guarantee that the interest rate will rise so you may get the short end of the stick.
Disadvantages of Money Market Accounts
MMAs have minimum balance requirements and if you fall below the threshold, you may be subject to fees. Another con of these accounts is that in order to get the best interest rates, you may have to maintain a high minimum balance in your account.
Money market account interest rates offered are typically lower than CDs, making them a poor choice for long-term investments. Similar to CDs, the interest rate is subject to taxes, which can eat into your returns.
When to Choose CDs and When to Go With MMAs
When it comes to choosing between CDs and MMAs, it mainly depends on your personal financial situation and goals. If you have a lump sum of money that you don't need access to for a set period of time, then a CD might be the better choice. On the other hand, if you want to earn a higher interest rate than a standard savings account while retaining some flexibility, then an MMA might be a better option.
It's worth noting that both CDs and MMAs are relatively low-risk investments. If you're willing to take on more risk, then you might consider investing in the stock market or a mutual fund. However, these types of investments are subject to market fluctuations and can result in losses.
In the end, choosing between CDs vs MMAs is a personal decision that relies on a few factors. Individual financial goals, the state of the economy and risk tolerance to name a few. With that said, investing some money in one of these low-risk options is a good decision if you’re looking for a return on your investment.