Money Market Accounts vs. CDs
If you have a few thousand dollars that need a safe home, either a certificate of deposit (CD) or a money market account (MMA) could work well for you. Which one to choose depends on your financial goals and requirements, as well as your investment time frame.
Certificates of Deposit
A CD is a term investment in a bank account. You agree to leave the money in the account for a certain term for a set annual yield. All terms, including the annual interest rate, penalties for early withdrawal of funds and renewal possibilities are set out in the written agreement you sign when you commit.
Occasionally, CDs come with options to add funds to the account during the term or to increase the yield if interest rates rise.
CD Pros and Cons
A CD works best if you have cash you know you won't need for a certain period of time, like money you're saving for graduate school tuition. These savings vehicles pay a steady rate of interest and are insured by the federal government, so you are certain to get back the sum you put in, plus the set rate of interest.
Unfortunately, current CD interest rates are not inspiring, but they are acceptable compared with the rates on other risk-free bank products. Shop around before you choose one to get as good a rate as possible.
Money Market Accounts
A money market account, or MMA, looks a lot like a bank account, so you need to focus on the differences. Although you won't get the best interest rate on the planet, you will get a higher rate of interest on an MMA than you'll see with a CD or regular savings account. On the other hand, you may have to put in a minimum amount to get the highest rate and pay penalties if your account balance slips below the minimum requirements.
MMA Pros and Cons
Money market accounts are also insured by the FDIC and are very safe places to stash money. Banks often give you checks and a debit card with an MMA, so your funds are easy to access. This could be good or bad, depending on your goals.
Money market accounts have no term limits so you can close the account whenever you want without any penalty. However, MMAs often have limits on how many transactions, such as withdrawals or transfers, you can make every month. Since a money market account has a variable, or market-based, interest rate, it's a better bet in a rising market but not so good in a sinking market.