Choosing between Money Market Accounts and CDs

Money market accounts and CDs are both popular ways to gain interest while keeping your money safe. Both of these are often used in between investments such as purchasing stocks or options. Depending on your current situation, a money market account or a CD could be right for you. Here are a few things to consider about both forms of investment. 

Certificates of Deposit (CDs)

A certificate of deposit is commonly available at any one of your local banks. With CDs, you are given specified terms and specified rates of interest when you deposit your money. For example, the bank will tell you how long they are going to keep your money and the exact amount of interest that you can expect to get back. CDs are insured by the FDIC up to $100,000. Therefore, as long as you keep your CD under $100,000, they are a risk-free form of investment. You can get a CD with a time period as short as a few weeks or as long as a few years. You have to match your needs to the term of the CD and buy one accordingly. 

These types of investments are great for those that want to maintain their wealth. You are not going to get rich with one of these, but you aren't going to lose your money either. You will receive a better interest rate than you would from a savings account, so it will at least get you something back for your money. 

With a CD, you cannot take out your money before the maturity date. If you do, you will usually pay some type of penalty for withdrawing early. Therefore, your money is tied up for a certain period of time. You cannot do anything with it and you give up the opportunity of making other investments along the way. Therefore, you should only use money that you know you are not going to need for a while. 

Money Market Accounts

A money market account is kind of like combining a CD with a checking account. You get access to your money whenever you want it and you can still earn some decent interest along the way. With a money market account you can access the funds via a checkbook or even a debit card in some cases. With some money market accounts, you have a maximum number of withdrawals per month, so it is not exactly like a checking account.

When you put money into a money market account, the investment company that holds the money uses it to make very safe investments. They buy T-bills from the government, bonds, and CDs to provide a steady stream of interest. It is much like a very safe mutual fund. They take the profit that they make and disburse it to all of the money market account holders. 

The great thing about a money market account is that you can still use your funds to invest whenever an opportunity comes along. If you like flexibility, a money market account is superior to a CD. 



Are money market checking accounts FDIC-insured?

If money market checking accounts are originated at a bank, they are insured by the FDIC. This means that the FDIC will step in and pay for the money in your account up to $100,000 if the bank goes out of business. However, some people get this type of account confused with another option. Mutual fund companies offer a money market mutual fund that is very similar to a money market account with a bank. If you invest in a money market mutual fund, it is not going to be insured by the FDIC, and your money will be at risk.

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