If you’ve got some extra money scattered on various accounts, it is difficult to resist the temptation to use it for a vacation, a new car, or home renovation. But let’s say you were able to do all that and decided to save your money instead. Now, comes the misleadingly-simplistic question, where do you stash it? There are two basic options: the certificate of deposit (CD) and the money market account.
There is no general answer to this because the needs of each individual are different. It is important for you to know your needs, goals, and priorities. Making the wrong decision can costs you a lot of money so know what you need and get it right. Don’t mistake the money market account with a money market fund because there are two distinct financial products.
The money market fund is usually offered by a mutual fund company or a brokerage house. It typically provides a higher return compared to the money market account. The fund invests in short-term notes and government securities so it is considered to be relatively safe. However, take note that it is not covered by the Federal Deposit Insurance Corp. There is the possibility of losing money when you invest in a fund. If you are a highly conservative person, it may be better to pass this up and look at two options mentioned above instead.
What Should You Choose?
Personal saving is the foundation of your financial health. It provides a high standard of living for the entire family and it enables individuals to create wealth. Having a sound savings program involves planning, commitment, and strategizing. Initially, the goal of a person would be to save enough funds for short-term and emergency expenses such as education, vacation, or any other expected expense in the near future. But of course, everyone wants to maximize the returns on their money while it is being kept at the bank. The traditional savings account, the CD, and the money market accounts are all good alternatives.
Savings Account
The traditional “passbook” accounts are classic favorites because it entails almost zero risks. A lot of people start building wealth using the savings account. The interest rates are very minimal although the FDIC insures your money to up to $100,000. Over time, the interest you earn from this account is usually not sufficient to keep up with the inflation rate. Almost nobody stash their money in the savings account once it reaches five-digits.
Money Market Accounts
This type of account invests in government securities and short-term corporate investments. Though it offers a higher interest rate compared to the savings account, there is typically a required minimum balance as well. The number of withdrawals you are allowed every month is also limited and you may be charged a penalty if the minimum balance is not met. It is also covered by FDIC.
Certificate of Deposit
Still a FDIC insured investment, the CD is a short to medium-term financial product that is available at banks and other financial institutions. CDs provide an agreed upon interest rate for a certain period of time. Take not that you will pay a penalty fee if you decide to withdraw the money before maturity date.
One concept you need to understand about CD is that the annual percentage rate (APR) and the annual percentage yield (APY) are two different things. APR is the interest rate that was stated for the year without compounding. Meanwhile, the APY is the APR in addition to the compounded interest rate.
