Money Market Account vs CD? This question can confuse people easily. Saving money is important, but it can be difficult to know where to start.
If you’re looking for a way to grow your savings quickly, you may want to consider a Money Market Account (MMA) or Certificate of Deposit (CD). Both options are high-yield savings accounts.
These accounts offer better interest rates than regular savings accounts, making them a great way to build your funds fast.
When comparing the money market account vs CD, it’s important to consider what’s important to you. Do you want immediate access to your funds?
Or are you willing to lock your money away for a time to earn a higher interest rate? In this blog post, we will explore MMA and CDs. Then compare the benefits and drawbacks of each option to help you decide which is the better fit for you.
What is a Money Market Account (MMA)?
Money market accounts are a blend of savings and checking accounts that typically offer higher interest rates than traditional savings accounts. You can get MMAs from banks, credit unions, and online banks.
You can keep large amounts of cash in a money market account without worrying about losing value. This is because the bank guarantees that whatever isn’t invested into more profitable investments like stocks or bonds could never go below what was deposited for safekeeping.
This means there’d be no risk involved! All these make MMAs better than a normal savings account.
Advantages and Disadvantages of Money Market Accounts (MMA):
There are many advantages of a money market account. However, it is important to understand the features and risks associated with MMAs before opening an account or investing your money.
Here’s everything you need to know.
The Advantages of MMA
MMAs come with many beneficial perks. Such as:
- They have higher rates than most savings accounts.
- All banks must accept them if required by law, although many give their customers alternatives to different installment plans based on their requirements.
- Some MMAs will offer a checking account to make it easier to manage day-to-day finances.
- They also offer features like check-writing privileges and debit cards, making them a great option for people who want easy access to their money. This makes them superior to regular savings accounts.
- MMA also allows you to withdraw money.
- Your money will be FDIC insured in MMAs.
The Disadvantages of MMA
Like its many beneficial perks, Money Market Accounts also have a few downsides you must know. These downsides are:
- MMAs have higher minimum balance requirements. The requirement of a minimum balance to open a money market account can be a disadvantage, particularly when compared to other types of savings accounts.
- MMAs also require a higher minimum deposit than a typical deposit account.
- Also, the transaction limit of MMAs is only 6 transactions per month. (This isn’t essentially a drawback if you can manage it right.)
Nevertheless, MMA allows you to park your funds in a secure, reputable place while still earning a higher interest rate than a typical savings account. When used correctly for short-term cash parking, it is an effective instrument for anyone wishing to get a better return on their deposited money.
What is a Certificate of Deposit (CD)?
A Certificate of Deposit (CD) is a bank or credit union product that allows customers to earn higher interest rates in exchange for keeping a lump-sum deposit untouched for a defined time. Like MMAs, you can get CDs from credit unions, banks, and online banks.
CDs typically have terms ranging from three months to five years, and the longer the term, the higher the interest rate. For example, a one-year CD may have an interest rate of 1%, while a five-year CD may have an interest rate of 2%. That may not seem like much, but it can increase over time.
So, a CD might be right for you if you’re looking for an investment with a little more security and potential for growth than a savings account.
Advantages and Disadvantages of Certificate of Deposit (CD)
Certificates of deposit offer several advantages over other savings vehicles, but there are also some potential disadvantages you should be aware of before investing your money.
By understanding the pros and cons of CDs, you can make an informed decision about whether this type of account is right for you.
Let’s take a closer look at both sides of the coin!
The Advantages of CD
The advantages or benefits that CDs offer are mentioned as follows:
- The interest rates on Certificate of Deposits are usually higher than on savings accounts and MMAs.
- Interest rates on certificates of deposit are usually fixed at maturity. This means that the interest rate won’t change depending on market conditions, which can make it less risky for you to invest in these types of accounts as opposed to other financial products like stocks or bonds, where investors have fluctuating returns depending on their investment strategies
- And because the money is locked away for a set period, it can be a great way to save for a specific goal, such as a down payment on a house or a child’s college education.
The Disadvantages of CD
The drawbacks that you might experience with a CD are mentioned as follows:
- You might be subject to early withdrawal penalties if you withdraw your money before the CD’s maturity date.
- You must make a lump sum deposit at the beginning of your term and cannot add incremental savings thereafter because there’s no way for you to invest in intermediary products that would guarantee higher returns on top of what is already being given by the financial institution holding your CD.
Moreover, CDs can be an attractive option for people who want to save for a specific long-term goal, like retirement or a house, and don’t want the temptation of spending their money on something else.
Money Markets vs CDs vs Savings Accounts: Interest Rates
Regarding interest rates, money market accounts typically offer higher rates than savings accounts. The average MMA interest rate is 0.08%, while the average savings account interest rate is a mere 0.05%. Money market rates have declined recently but are still higher than traditional savings account rates.
Comparing money market vs CD, CDs typically offer higher rates than money market accounts and savings accounts. The average one-year CD rate is 0.24%, and that for five-year is 0.41%.
The current statistics show that the average CD yields have substantially fallen since the ’80s. In the ’80s, a 5-year CD had the highest interest rate of 11.62%, which declined to 7.04% in the early ’90s. It kept declining and fell to 2.54% in 2003, which rose to 4.16% in 2016. In 2021, the rate further declined to 0.28%, and now in 2022, it has slightly increased to a 0.31% interest rate.
However, it’s essential to remember that CD rates are usually fixed for the length of the term, while MMA rates are variable and can change over time. On the other hand, savings account rates are fixed, which means they will remain the same for the length of the term.
When to Choose an MMA over a CD
Considering all the above information, a Money Market Account (MMA) may be chosen over a CD if you need or prefer the following options:
- Regular Deposits and Withdrawals: Money market accounts are a great option if you want to deposit and withdraw money more often.
Withdrawing from an MMA is just as easy, with no withdrawal restrictions outside of six per month, not counting in-person or ATM withdrawals. It’s also important that the option is available for adding funds regularly because it means there’ll never be any motivation lost due to lack thereof – saving opportunities slipping through one’s fingers!
- Checking Account Facilities: Some MMAs offer the same features as a checking account with no drawbacks. These facilities are debit cards alongside ATM withdrawals, making traveling around town much easier than lugging heavy cash around on vacation.
- Money Market Mutual Funds: Money market funds are a great way to invest your money in something that will give you access to high liquidity with minimal risk. They may also be known as “money market mutual funds”.
When to Choose a CD over an MMA
Considering the above advantages, disadvantages, and interest rates of a Certificate of Deposit in comparison to that of MMAs, you can choose a Certificate of Deposit (CD) over an MMA if you need or prefer the following options:
- Saving Up for Big Purchases: CDs are a good option for those who want to save money for an important purchase, such as purchasing your first home.
CDs are a great way to keep your money safe and secure. You don’t want large amounts of cash sitting around doing nothing, after all! CDs require waiting until they expire before withdrawing or depositing any funds, which can be handy if you save up for something expensive.
- A High Yield on Your Investments: You want to get the best rate possible for your money. A CD might be a good option since they have higher yields than other MMA or bank accounts on average!
- Risk Aversion: CDs are your go-to savings accounts if you intend to avoid risks. CDs are long-term investments with a guaranteed rate of return. They carry none of the fluctuating value that stocks have, and they’re also easier to manage because you don’t need as much knowledge about financial markets to work properly!
Bank or Credit Union?
While deciding about MMAs and CDs, one might wonder whether they should go for a bank or credit union.
There are many banks in the US, and they all have different rates of interest. Still, credit unions will often offer better terms when it comes down to Money Market Accounts (MMAs) or certificate deposits (CDs).
If you want a greater return on your investment, go with one that allows you to access this sort of account from traditional financial institutions like Bank of America. Otherwise, opt for another organization, such as The Million Dollar Loan Refinancing Program at the Credit Union.
When it comes to Money market accounts, credit unions don’t have the same high requirements that banks do for you to open an account. So, if you want to save money and get a higher interest rate, go with a credit union.
Also, credit unions offer the same safety and soundness as banks, but with one major difference. They require reserves like banks but offer more protection with mandated lending practices.
These lending practices are designed around what’s best locally rather than individual customers’ goals which can lead to success overall!
Considering the above information, credit unions should be an excellent alternative for people who wish to keep their money safe and spend more on their savings.
Which Option Will be Better for You in the End?
So, what’s the verdict? Money market account vs CD – which one is the better fit for you? The answer to that question depends on what you’re looking for and your goals. If you’re looking for a short-term investment with easy access to your money, a money market account may be the right choice.
However, if you want to earn a higher return on your investment and are willing to lock your money away for a longer period, a CD may be a better option.
Whichever route you decide to go, make sure to do your research and compare interest rates before making a final decision.
We hope the information in this article can help you decide which savings account is right for you. Thanks for reading!
Money Market Account vs CD FAQ
1. What is a savings account?
A savings account is a type of bank account that allows you to save money and earn interest on your balance.
Savings accounts are a safe, accessible way to save and can be a helpful tool in your overall financial strategy.
2. Where Can You Open Money Market Accounts and CDs?
You can open a money market account or CD at Banks and Credit Unions.
3. How to use the money market account and CDs to save for your goals?
When it comes to saving for your financial goals, a couple of options are available to you. For example, you could use a money market account or CDs. Each option has its own benefits that can help you reach your goals more effectively.
A money market account is a great option if you need easy access to your money. On the other hand, CDs offer higher interest rates, making them a better choice if you want to maximize your earnings.
4. How does a money market account work?
A money market account is a type of savings account that typically pays a higher interest rate than a traditional one.
The funds in a money market account are usually invested in short-term debt instruments such as securities, including Treasury, municipal and corporate debt, and bank debt securities.
Money market accounts generally require a higher minimum balance than a traditional savings account but offer greater flexibility regarding withdrawals and transfers.
5. How do CDs Work?
Certificates of deposit usually have a fixed term, meaning you agree to keep your money in the account for a set period, such as six months or a year. In exchange for this commitment, the bank typically pays a higher interest rate than it would on a regular savings account.
6. What happens if you need your money saved in a CD before the end of the term?
If you need to withdraw your money before the end of the term, you may be charged a penalty, such as early withdrawal fees.
7. When to Choose a Savings Account Instead?
Opening a savings account rather than an MMA or CD makes more sense if you want to save for a short-term objective, such as an emergency fund. A savings account will generally be the route to go in that situation.
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Originally posted 2022-09-02 21:04:41.