SHOULD I USE A MONEY MARKET ACCOUNT OR A CD?
If you have money you want to put away safely, how do you go about choosing whether you should put it in a savings account, a bank CD, or a money market account? Right now at this point in time in 2009, this decision is complicated by the fact that interest rates are low and people are scared. The best money market interest rates and any other CD rates are so low that it hardly matters. With the stock market in freefall for a better part of a year, people want to know their money is safe.
A bank CD or certificate of deposit is, and has been, one of the safest historical investment vehicles you can choose. It is hard to use the word “investment” right now though with the best CD rates barely over 2%. With a bank CD, you loan the money for a predetermined amount of time and in exchange the bank gives you a set interest rate. Usually, the longer you agree to loan the money the higher the rate you will get.
Certificate of deposites are nice if you want security and to know exactly what you are getting. Since you know the rate, you will be able to figure out what you will get at the maturity date. They are now insured by the FDIC up to $250,000.00 per person per institution. If you have more than that amount you will need to make deposits at multiple banks to be 100% sure of their safety. Bank CD’s are easy to open and easy to understand which have always made them a favorite.
The only negative is that your money is tied up for the agreed upon length of time. If you need it out sooner, you can get it but there will be a penalty. This makes it important to know what time horizon you have and to not tie your money up longer than you think you might need it.
Another choice you have is a money market account. Most money market accounts come with some limited check writing ability and a lower interest rate than you could get with a certificate of deposit. Sometimes the best money market rates are dependent upon how much you put in so the more you have to invest, the higher rate you will get.
Depositing money in a money market account is even easier than getting a CD. It is very much like putting money in a checking or savings account at the bank and of course with the check writing ability, it is similar as well. Because you are not obligated to keep your money in the money market account for any lenght of time, the interest rates are traditionally lower than government treasury bills or bank CD’s.
Bank savings account are about the worst option for getting investment income as they always play a very low rate.
