If you have some extra money scattered throughout various accounts, it might be difficult to resist the temptation to use the funds for a vacation, new car, or home renovation project. But let’s say you bypassed those ideas 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 (MMA). 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 could cost you a lot of money, so know what you need so you can get it right.
Which Should You Choose?
Personal saving is the foundation of your financial health. It provides a high standard of living for your entire family and enables individuals to create wealth. Having a sound savings program involves planning, commitment and strategy. Initially, your goal could 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 money market accounts are all good alternatives.
Money Market Accounts
This type of account invests in government securities and short-term corporate investments. Though they offer higher interest rates than comparable savings accounts, money market accounts usually come with a minimum balance requirement. 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. Money markets at reputable banks — just like CDs — are insured by the FDIC.
Certificate of Deposit
Certificates of Deposit, or CDs, are short- to medium-term financial products available at banks and other financial institutions. A CD provides an agreed-upon interest rate for a certain period of time. Take note you will pay a penalty fee if you decide to withdraw the money before maturity date (you can find no-penalty CDs at some banks).
One concept you need to understand about your 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. The rate your CD earns usually depends on how long its term is. The longer-term CD, the higher the interest, generally.
Don’t mistake a money market account with a money market fund because there are two distinct financial products. A money market fund is usually offered by a mutual fund company or a brokerage house. It typically provides a higher return compared to a money market account. Money market funds invest in short-term notes and government securities so they are considered relatively safe. However, take note that it they are not covered by the Federal Deposit Insurance Corporation (FDIC). You could lose money when you invest in a fund. If you are a highly conservative person, it might be better to pass this up and look at the options mentioned above.