Money Market Accounts Vs. Certificates of Deposit

If you want to make the most of your investments and are interested in effective banking and budgeting techniques, you might want to start a savings program. With this in mind, you have different options. Money market accounts and certificates of deposit are great ways to save money while accumulating money.

Money market accounts, or MMAs, invest in short-term securities by the bank or investment firm. They provide higher interest rates than standard savings accounts, but they usually require a minimum balance. Further, they limit the amount of withdrawals per given month. If the minimum balance amount is not maintained, a monthly service fee is applicable. When investors open this type of account, they receive a checkbook to access funds. Depositing funds in money market accounts is easy; it is like depositing cash into checking accounts. The interest rate depends on the level of deposited assets, not to maturity.

Certificates of deposit (CDs), on the other hand, come with interest rates that are connected to maturity. Banks and other types of financial institutions issue these short to medium-term investments. In return for lending money, the investor receives a fixed rate of interest. Maturities can range from a few weeks to several years with the interest rate climbing in proportion to the time capital is tied up. The advantage of certificates of deposit is that the investor knows his or her expected earnings from the start. The disadvantage is that if the investor wants longer maturity—and so, a higher interest rate—he or she will lose access to the funds and alternative uses of the capital. Withdrawing money before maturity results in a tough penalty.