Investing

The Difference Between Savings, CD’s, and Money Market Accounts

The only difference between an MMA and savings account from an account-owner’s stand-point is liquidity.  Money market accounts are not quite as liquid as savings accounts.  You may need to wait a few (typically no more than 7) business days to make a withdrawal and you are much more limited in the number of transactions allowed on a monthly basis.

If you do not usually make monthly withdrawals from your savings account, then a money market account is a much better way to go.  The interest rates are much higher and you are still able to access money relatively quickly.  Some money market accounts, especially those offered by online banks, are even providing check books and ATM debit cards for faster withdrawals.

Certificates of Deposit (CDs)

A Certificate of Deposit or CD is another low-risk, interest bearing account offered by most brick-and-mortar and even more online banks.  CDs gain a predetermined amount of interest of a set period of time and offer higher interest payments than savings and money market accounts.  The catch is that you have to leave funds invested for the full term in order to collect the interest.  If you invest in a CD and have an emergency, you can still make an early withdrawal.  The difference is that you will have to forfeit some or all of the interest the account would have earned if it was deposited for the full term.  This sounds confusing but it’s really straightforward.  Here’s an example of CD options you could choose from:

As you can see, the longer of a term you commit to, the higher the percentage yield.  A CD is not always the best option when compared with a money market.  Some of the lower-end CDs (less than 1 year) can sometimes return less than a traditional money market.  The difference is that CDs are locked into these interest rates whereas money markets accounts can move up and down.  Another reason for choosing low-end CDs is if you are in the process of creating CD ladder.  CD Laddering is a great way to maximize your interest payments while minimizing the intervals between when CDs mature.  This sounds harder than it is and you can find more information about this process by going to: http://www.consumerismcommentary.com/how-to-create-the-ultimate-certificate-of-deposit-cd-ladder.

Which account is right for me?

Deciding which accounts and how much to put in each is largely a matter of opinion.  The important thing to remember is that savings vehicles are not checking accounts.  Many people use savings accounts and other interest-bearing accounts as a glorified checking account, making frequent withdrawals and deposits.  Not only do you run the risk of bank fees by doing this but you also miss the point of saving which is to only use these funds in case of an emergency.  If you expenses ebb and flow on a monthly basis, keep some extra money in your checking account to cover these peaks and valleys.  Dipping into any savings account should be for emergencies only and this concept is too often overlooked.

You should consider diversifying your cash account among the options listed in this article.  How you want to diversify is really up to you and little liquidity you’re comfortable with.  Going back to the 6-month emergency fund, here is an example of diversification.  For the sake of this example, we’ll assume John Doe has a monthly income of $4,000.

Account Months of Income Amount
Savings Account 1.5 months $6000
Money Market Account 2 months $8000
CD Ladder 2.5 months $10000

This is an example of how you can balance out liquidity and interest earnings to meet your specific needs.  Talk to your banking official or financial advisor to figure out a system that works best for you.  The good news is that if you follow the rules of these accounts, you can’t really go wrong.  You may not earn as much by using a savings account over a CD Ladder but you’re not losing money either.  A cash reserve is an integral part of personal finance and these accounts are useful tools to maintain your emergency fund.

About the author

Abbey B

Abbey B

Abbey uses her in-depth understanding of our customers to help answer their questions and create new products and services to help them pay down their debt, raise their credit scores, and stay on the path to financial health. When she’s not working, you can usually find her risking personal injury on a ski slope or wakeboard.

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