Exploring the difference between Savings Accounts, CDs, and Money Market Accounts
Chances are you’ve heard of savings, CD, and money market accounts, but you may not be familiar with the advantages and disadvantages of each. While there definite differences between the three types of accounts, the have several characteristics in common as well including the following:
- FDIC Insured: These accounts are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 each (at the time of this writing). This means that if the bank goes out of business while holding your funds for any reason, you will be reimbursed for the full amount (including principal and interest earned) without losing any money.
- Low-risk investment: As far as investments go, all three accounts are pretty much the lowest risk you can get. Interest rates are clearly defined and, barring any bank penalty fees, you cannot lose principal. This makes these investments ideal for cash holdings and emergency funds since they are extremely safe and highly liquid.
- High Liquidity: An investment has high liquidity if it can be withdrawn easily in cash. These three options represent some of the most liquid investments available anywhere. Typically you can receive your cash within 1-7 business days.
The Emergency Fund
An emergency fund is basically a cash reserve that can support you financially during… well… emergencies. It is recommended by nearly every financial planner to have an emergency fund however the actual amount of this fund can vary depending on who you talk to. Generally it is recommended to have six months of income in reserve to handle situations such as illness, job loss, unforeseen large expenses (home/car repair), etc. Six months of income is a lot of cash to have not working for you which is essentially how these products came to be.