While investing in stock markets is considered the most common form of investment, there are other sources such as money market accounts and certificates of deposits. Your investment is based on your appetite for risk and available liquidity.
If your priority is savings, opt for a money market account, but if you have plenty of time and patience, opt for certificate of deposits (CDs), which are ideal for long-term investments.
Money market accounts (MMA) or certificates of deposits (CDs)?
Money market account (MMA) is basically a type of high-yield saving bank account, except that it earns a higher rate of interest and requires lower minimum deposits than an ordinary savings account. Money market offers a few advantages over savings accounts, for instance, the deposits are insured by FDIC (Federal Deposit Insurance Corporation), and interest can be accrued up to the maximum amount.
Why should you have an MMA?
Here are all the possible reasons for having an MMA.
- If your bank is offering a high rate of interest.
- You want an insured account.
- You need access to your savings very often.
- You need to use checks often to pay.
- You need a debit card
- You might be depositing additional amounts in future.
- You want the advantages of both checking and savings account.
A CD or a certificate of deposit is a certificate of savings that comes with a maturity date and a fixed rate of interest. An investor cannot withdraw the money from a CD before the maturity date mentioned on the certificate. FDIC insures CDs up to $250,000 per person. All commercial banks issue CDs.
Why should you opt for CDs?
You should have CDs in case of the following:
- You want your dollars to be safe and secure.
- You want a higher rate of interest than a savings account or other forms of investment.
- You want to invest over the long term.
- You are looking for a low-risk investment.
MMAs and CDs have their respective set of benefits and downside. An MMA is ideal for individuals who need immediate cash or want some liquidity with their savings. For instance, if an investor keeps the same money in CDs, when an emergency strikes, they may have to break their CD and pay a penalty for withdrawing prematurely in the process.
Flexibility wise, MMA is a better option because an investor can have cash handy or write a check to cover any purchase. Moreover, MMAs have an advantage of rising rate of interest. When you invest in CDs, your money is locked for a period of 5 or 10 years at a fixed rate of interest. However, an investor does get the benefit of a fixed rate of interest, regardless of any rise or fall in the interest rate.
Simply put, short-term investors can opt for MMAs and long-term investors for CDs. Both types of investment are regulated and secured by FDIC. If your priority is high annual percentage yield (APY), CDs will give you that benefit. However, if liquidity is your concern and you are happy with a variable rate of interest, you should opt for an MMA.
