Money Market Accounts, Savings Accounts and CDs: Which One is The Best?
In this article you will learn about these types of accounts, how they work, what are their benefits and disadvantages, and which one is the best for you.
How much interest would you like to earn? And for how long are you willing to give up that money? Find out the tradeoffs here
Money Market Accounts, Savings Accounts and CDs, which one is the best? The answer to that question depends on a number of factors.
All of them have in common the fact that they are all relatively safe places for you to save your money.
Not only because they are regulated, but also because they will help you keep inflation from eating away the value of your money.
However, there are a few important differences between them to consider befire deciding where to put your money. One such difference is how much they cost.
Other differences include how each of these accounts limits withdrawals and how much interest you can earn over time.
To help you decide which one is the best, here is a breakdown of how these financial products differ from one another, and how you can choose the best one for you.
Money Market Accounts
Also called by its acronym, MMA, this type of account feels pretty similar to one in which you merge checking and savings into one single account.
When you open a Money Market Account you get a debit card which gives you direct access to the money you have put in it.
You also get checks that also allow you to spend that money.
It is important to make the distinction between a Money Market Account and a Money Market Fund.
While the first works for an interest-bearing deposit, the second works as an investment.
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Benefits of Money Market Accounts
Money Market Accounts (MMA) offer easy access to funds through a debit card with which you can either make purchases or ATM withdrawals.
Find yourself a good MMA and you will earn higher interest than you otherwise would with the best high-yield savings accounts.
Also, you can find them at banks and credit unions.
Such financial institutions have insurance coverage from the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA).
This ensures that your money (up to the amount of $250,000) is not going anywhere.
Even if the bank or the credit union declares bankruptcy, you still get your money back.
Disadvantages of Money Market Accounts
Money Market Accounts have a limit to how many times you can withdraw money.
This limit is usually six withdrawals a month according to the excessive transaction rule, which bears the name “Regulation D”.
In 2020 some banks have eliminated these limits due to a suspension of Regulation D. However, some banks still charge fees for exceeding withdrawal limits.
Another disadvantage of MMA is that some banks may have a minimum balance requirement.
This requirement could vary from bank to bank.
Savings Accounts offer a good balance between security, access, and cost. They often pay lower interest, although some high-yield savings accounts offer higher rates.
Benefits of Savings Accounts
Savings Accounts incur no risk of negative return. Interest rates may vary, but you will not lose the money you have deposited.
Just like MMAs, you can find Savings Accounts in banks and credit unions, and for that very reason, they have the insurance coverage of the FDIC and the NCUA.
Another advantage of Savings Accounts is that they require almost zero thought other than deciding how much you will save.
Disadvantages of Savings Accounts
Unlike MMAs, Savings Accounts do not come with a debit card. If you need access to the money, you are going to have to transfer it to a checking account.
There are also restrictions on withdrawals. Just like MMAs, Savings Accounts are subject to Regulation D, which restricts withdrawals to 6 per month.
It is worth pointing out, however, that some banks have recently suspended enforcing Regulation D for savings accounts.
Another disadvantage of Savings Accounts (perhaps the major one) is that most of them offer low APYs.
There are, however, HYSA that offer APYs as high as some MMAs’.
Certificate of Deposit (CD Accounts)
A Certificate of Deposit works like this: you lend money to the bank for a specified period of time, and the bank pays you interest on that loan.
A CD works as a fixed-interest savings account. However, because the term of the loan is specified, you cannot withdraw the money before that period is over.
The interest you receive is a function of how long you are willing to commit the money. The longer the time, the higher the interest rate you will earn.
Also, you cannot add money to it anytime you want. Certificates of Deposit will only hold the initial deposit. If you wish to add more money, you must open another one.
Benefits of Certificates of Deposit
Certificate of Deposit offer higher interest when compared to other types of savings accounts. Additionally, the interest you earn on your money is fixed.
This means even if there is a downturn in interest rates, you will still receive the same interest that you and the financial institution agreed upon.
This gives you a good degree of predictability, which in the world of savings and investing is extremely desirable.
Other types of savings accounts may have variable interest rates.
Disadvantages of Certificates of Deposit
Certificates of Deposit generally require a larger initial deposit, while you can start with very small amounts in Savings Accounts and Money Market Accounts.
Another disadvantage is the lack of flexibility Certificates of Deposit offer. Once you have committed the money, you cannot withdraw it.
If you insist on doing that, you will forfeit part or all of the interest you might have earned because of penalties.
Depending on how early you withdraw the money, you may even end up withdrawing less than you initially deposited because of penalties.
Another thing to watch for is when interest rates increase. Because CDs have a fixed interest rate, when interest rates increase, you may find yourself stuck with low rates that may not outpace inflation.
The Bottom Line
Deciding between a Savings Account, a Money Market Account and a CD is a matter of what works best for you.
Consider how much money you have available and for how long you are willing to commit that money, and you will find the answer.
And If you’re thinking about getting a savings account, you should open more than one. Do you know why?
There are many reasons for it. We’ll tell you 7 reasons for doing this financial strategy – read the content on the following to get these tips for you!
About the author / Danilo Pereira
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