CD vs Money Market the Better Option

Stocks or bonds have long-term lock in periods and may not go down very well with investors who have the money but do not wish to block it for long periods of time.  At the same time, putting money in a savings account or a checking account is not feasible due to the low interest rates they offer.  What does one do in a situation such as this?  The obvious choice would be between money markets and certificates of deposit.  Out of the two choices one has the option to pick and choose the appropriate one depending on individual factors and affordability.

A certificate of deposit (CD) is an investment plan wherein the investor invests the money for a definite period of time wherein, he/she is paid a higher interest when compared to a savings or checking account.  The longer an investor stays invested the higher the returns.  The lock-in period can vary between a few months to a few years and hence one should be prepared to stay invested for that period and until the date of maturity to avail the higher returns.  The minimum purchase amount is $1000.  The Federal Deposit Insurance Corporation (FDIC) insures up to $100,000.

Some investors chose Certificates of Deposit (CD) for varied reasons.  They use CD’s as a safety net to put away a portion of their money.  This investment has different dates of maturity.  This way the money does not get locked for the same period of time and instead it can be withdrawn at different periods.  Since the lock in is not for the same period or for the same rate of interest it is better to invest in this manner.  This is known as building a certificates of deposit ladder.

A money market deposit account (MMDA) is more or less like the checking or savings account.  These are liquid investments and are of much shorter duration unlike the CDs.  Though there might be little investment with no minimum deposit required, the interest rates are higher only when there are substantial investments made.  FDIC insures MMDA’s also but it is always wise to verify the same.

MMDA’s are much more accessible to investors than CDs but comes with certain limitations.  Federal regulations that govern these investments limit the number of transactions per day.  For instance, there might be restrictions on the number of withdrawals in some banks.  Some banks might not allow more than 6 transactions per month per account.  While MMDA’s offer greater flexibility in terms of withdrawal of money, the interest rates it offers are much lower unless the money invested is substantial.

The bottom line is to stay invested for longer periods in order to be able to enjoy the returns.  Like the old saying money makes money.