Money market (MM) deposit accounts and certificates of deposits (CD) are popular low-risk savings vehicles offered by banks and other savings institutions. Both types of deposits enable you to keep your extra money as cash and earn interest more than what a traditional savings account can be expected to generate.
FDIC
Both MM accounts and CDs offer a secure way to deposit your money. The United States Federal Deposit Insurance Corporation (FDIC) insures total account deposits of up to $250,000 per depositor in each insured bank. Should your bank declare bankruptcy, you can expect your MM and CD deposits to remain safe. In contrast, your investment in stocks, bonds, mutual funds and annuities is not FDIC-insured, and preservation of the original principal is not guaranteed.
Liquidity
One major difference between CDs and MM accounts is that the CD comes with a pre-defined term that typically ranges from three months to several years. Cashing in your CD before its maturity date incurs a penalty set by the bank. The penalty can amount to several months worth of interest. In contrast, the MM account has no set term and no penalty whenever you choose to close the account.
Fees
While banks typically charge no fees to maintain CDs, they may charge monthly fees in the range of $10 or $20 for MM accounts that fall below a certain balance. These monthly fees can negate any interest earned and even cut into your original principal. You can avoid these fees by shopping around and making informed decisions about the types of accounts to maintain.
Interest Yield
For the same amount of deposit, one-year CDs tend to earn a slightly higher interest rate than MM accounts in return for more restriction in cash access for CDs. Banks commonly reward larger initial deposits and higher account balances with a higher tier of interest yield for both CDs and MM accounts. Go to Bankrate.com to obtain free online comparisons of the interest yields and minimum deposit requirements offered by different FDIC-insured banks.
Considerations
Consider opening a long-term CD as a part of your cash portfolio for the extra money that you do not anticipate needing for the duration. Long-term CDs generate higher interest yields than short-terms ones because banks can better count on long-term deposits to generate loans to other customers and make money. Consider building up an emergency cash fund worth at least 6 months of living expenses in a MM or savings account. Making small, regular deposits to the MM or savings account every month or from each paycheck can help you meet your financial goals. To facilitate fund transfer, link your money market account to a checking account in the same bank.
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