How To Choose Between CDs Money Market Accounts and Savings Accounts

Barbara Marquand | guest writer for GoTalkMoney

CD, Money Market, or Savings Account?

CDs, money market accounts, and savings accounts all play a role in a healthy savings strategy, whether you're looking toward retirement or stashing cash for a rainy day.

But each has its pros and cons and one may work better than another at a particular time, depending on your goals and situation. Consider the options carefully when you have some extra cash to invest and choose the savings vehicle that best meets your objectives.

Here are the pros and cons of each investment vehicle:

CDs: The Upside

Certificates of Deposits are debt instruments issued by banks. You agree to deposit money for a certain amount of time, and after the CD matures, you collect the original deposit plus the accrued interest. CDs are lower risk than stock market investments because they're insured along with your other bank deposits by the FDIC for up to $250,000 per person per financial institution. They offer higher interest rates than savings or money market accounts, which means a higher return on your investment. Shop around for the best CD rates, whether you want to put your cash away for one month or seven years. The longer the term, the higher the interest rate.

CDs: The Downside

CDs aren't the best savings vehicle if you think you might need access to your cash before the CD's maturity date. Some CDs don't allow early withdrawal, and some charge a penalty. CDs aren't completely without financial risk. Inflation could outpace a CD's interest earnings--a scenario more difficult to predict with longer term CDs. Make sure you read the fine print to understand when a CD matures and you understand the various special features of a CD. For instance, "one-year non-call" means the bank can't call the CD in the first year; it doesn't refer to the maturity date, which may be many years from now. And don't fall for phony CDs that offer unbelievable returns--if they seem too good to be true, they probably are.

Money Market Accounts: The Upside

Money market accounts are high-yield savings accounts. They provide more access to your cash than CDs, and they often carry a higher interest rate than regular savings accounts. Money market deposit accounts at banks are FDIC insured, not to be confused with money market mutual fund, which comprise a variety of short-term conservative debt investments and do not carry FDIC insurance.

Money Market Accounts: The Downside

Money market accounts offer lower interest rates than longer-term CDs, and although they provide greater access to your cash than CDs, there's a limit to the number of transactions you can make each month. Some money market accounts also require a hefty minimum deposit amount.

Savings Accounts: The Upside

Savings accounts let you deposit or withdraw cash whenever you need to, or transfer balances online to a checking account. They have low or no minimums to open an account.

Savings Accounts: The Downside

Regular savings accounts usually offer lower interest rates than money market accounts.

CDs, Money Market and Savings: Making the Right Choice

As you consider which savings vehicle to use, ask yourself these questions:

How much money do I have to invest?

Will I need to get access to the money?

When will I need to tap into my savings, and how often will I need to make transactions?

How much interest can I earn?

No matter which option you choose, shop around for the best interest rates on CDs, money market and savings accounts.


FDIC • Certificates of Deposit: Tips for Savers • Oct 04, 2008 • http://www.fdic.gov/http://www.fdic.gov/deposit/deposits/certificate/index.html

FDIC • Insured or Not Insured? • Oct 04, 2008 • http://www.fdic.gov/news/news/financial/2009/fil09022.htmlhttp://www.fdic.gov/consumers/consumer/information/fdiciorn.html

Joan Goldwater • What You Need to Know About CDs • Jun 01, 2009 • http://www.kiplinger.comhttp://www.kiplinger.com/magazine/archives/2009/06/what-you-need-to-know-about-cds.html

Walter Updegrave • A whopping .04% return on savings • Oct 16, 2009 • http://money.cnn.com/2009/04/02/pf/expert/high_yeilding_CDs.moneymag/index.htm?postversion=2009040305http://money.cnn.com/2009/10/15/pf/expert/low_savings_yield.moneymag/?postversion=2009101605

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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