What is the difference between certificates of deposit and money market accounts?
Saving is one important financial aspect that people should start being involved with. The world economy is an unstable ground bringing people uncertainties about what might happen next; thus it is crucial that people begin to save more than spend more. Nowadays the banking systems offer several ways on how people can save some money for their future expenses and by doing so, people may earn passive income. Passive income is the money earned through the interest rates of deposits. It uses the term “passive” because people can earn money without doing anything – the money grows by accumulating the interest.
Money market account and certificate of deposit are two distinct ways on how people can secure some amount for future use. These two are forms of deposit that yield interest rates however the certificate of deposit, also known as CD, can yield higher interest rates than money market.
Yet, despite the higher interest rate people may earn with certificate of deposit account, it is important to remember that this form of deposit restricts depositor from withdrawing the money before the maturity date. Some CDs which allow clients to withdraw before maturity restricts the frequency (and amount) they can get. This particular feature may be viewed by some as a weakness but it can also be strength for others. Indeed, by using certificate of deposit people will be saving more than any other forms of deposit given that depositors do not have full access in withdrawing money. Because of this, the money is really secured for a specific period of time and the longer the deposited money remains untouched, the higher the interest rate it earns. So for people who find it hard to leave their deposited money alone, or to those who are look at their savings like some pocketed amount which they can withdraw and spend anytime they had the urge to do so, CDs can really be of great help.
However, for those who could not really afford locking up their savings because they want to be able to withdraw funds immediately in case of emergency, there are several types of CDs you can choose. But if you are saving for a pregnancy or travel, you need to look at the maturity date closely. Short term CDs can expire in 3 months, others in 6 months to 1 year. If you can’t find a term that’s convenient for you, then it is best not to use CDs as an investment tool. In this case, the money market account will work better. With a money market account, the depositor can withdraw their money anytime but the interest rate can vary, depending on the current market rate. Hence, it could happen that the money market account does not earn anything because the rate is lower than those offered for CD accounts.
To maximize the benefits of these two forms of deposit one must be able to analyze his/her financial strength and needs. If one can keep up with emergencies without needing to touch the deposited money, CD can be a better option however if one cannot be certain about their financial future, it is best to get money market account so that withdrawal options are not restricted.
