Money Market Accounts vs. Certificates of Deposit (CDs): Which is Right for You?

Money market accounts are often compared with CDs as a way to save your money. Neither one of them are going to make you wealthy with their interest rates, but they can be a safe place to keep your money when you are not ready to invest. Both types of accounts are beneficial and , the best choice will depend on your situation.

Certificate of Deposit, CDs

CDs can be obtained at almost any financial institution because they are very popular and have been around for a number of years. With a CD, you choose exactly how long you would like to invest your money. You can choose a term as short as a few weeks or as long as a few years. Before you put your money into one, you have to decide exactly how long you can invest. For example, if you will not need your money for six months, you would specify to the bank that you would like a six month CD. During that time, they will take your money and use it to invest in very safe investments.

CDs are insured by the FDIC and are very low-risk investments. They are very popular for the retired and elderly because they are just trying to maintain their wealth. With these types of account, you keep up with the rate of inflation. 

The downside to a CD is that you cannot take your money out early because of  steep penalty fees. This will cause you to lose a large percentage of your money when you take it out of your account.

Money Market Account

Using a money market account is similar to a CD, except it is more flexible. A money market account  is managed like a checking account. You are typically given a checkbook or a debit card to access the account. You can use it anywhere you want and access it just like your checking account.

When you put money into a money market account, it is almost like buying shares into a mutual fund. They try to keep the share price as close to a dollar as possible. They take this money and invest it into T-bills, bonds and other safe investments. This way they can get a little bit of a return without risking your money too much.

The downside to this transaction is when some financial institutions place a limit on the amount of transactions that you can do. You might have a limit to how many checks you can write in a given month. Other than that, these types of accounts will allow you an easy place to store your money between investments.