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Personal Finances

Money Market vs. CD: What’s the Difference?

Money Market Accounts and Certificates of Deposit (CDs) are two of the most popular savings option types at banks. Both allow individuals to earn interest on their savings while keeping their money. However, there are some fundamental differences between the two that individuals should be aware of before deciding which one will suits respective savings needs.

Benefits of a Money Market Account

Money market accounts offer several benefits that make them an attractive savings option for individuals. One of the most significant advantages of a money market account is that they offer more liquidity than CDs. You can access your money quickly and easily if you need it. Money market accounts also typically offer higher interest rates than traditional savings accounts, so account holders can earn more money on savings.

Another benefit of a money market account is that it often comes with check-writing capabilities, making it convenient for everyday use. Many financial institutions also offer tiered interest rates. As a result greater savings via a higher interest rate.

Most money market accounts also come with a debit card to allow purchases and withdrawal of cash as needed. Finally, the FDIC insures money market accounts, protecting the account holder’s funds up to $250,000 in case of the bank’s failure, though recent events have shown that this is unlikely but possible.

Drawbacks of a Money Market Account

While money market accounts offer many benefits, there are some drawbacks as well. One disadvantage is that they typically require a higher minimum balance than savings accounts. Account holders may need to maintain a certain balance to avoid fees or penalties.

Another drawback of a money market account is that it may limit the monthly withdrawals one can make. Frequent need for access to funds can be a disadvantage; yet, a money market account typically offers lower interest rates than a CD, which is its main drawback.

Benefits of a Certificate of Deposit

When looking for a savings account offering better interest rates, a Certificate of Deposit (CD) could be an ideal choice. A CD is an account that allows the depositing of money for a fixed term and earns higher interest rates when compared to other accounts – in exchange for committing to keep the funds with the bank for a specified duration. Typically, the interest rates on CDs are relatively higher than standard savings or money market accounts because the bank reinvests the money during the fixed term.

The length of the term of the CD can vary. The longer the term of the CD, the higher the earning potential. Generally, CDs come with fixed interest rates, so the depositor know the exact amount earned over the term. This makes it helpful for those who want to plan their financial goals and needs accurately.

Plus, CDs offer a guaranteed return rate for a fixed period, giving a clear idea of the earnings received after the account matures. Depositors won’t have to worry about fluctuations in interest rates or market conditions. Additionally, CDs make an excellent option for saving without the risk of spending hard-earned cash.

When you deposit money in a CD account, the bank locks the funds, and you cannot withdraw them until the CD reaches maturity. CDs typically have maturity dates ranging from three months to five years.

Drawbacks of a CD

While CDs offer many benefits, there are some drawbacks to consider. One disadvantage is that they provide less liquidity than money market accounts. This means funds cannot be accessed until the maturity date without incurring a penalty.

Another drawback of a CD is that they typically require a higher minimum deposit than money market accounts. This means that saving/having a larger amount to reap the benefits of a higher interest rate, and as a result, a greater return.

Finally, if the money is needed before maturity and a withdrawal is made, an early withdrawal penalty is the end result. This can lead to a significant loss of earned interest, making CDs less attractive for those needing immediate funds access.

Are CDs Safer Than Money Market Accounts?

Both money market accounts and CDs are FDIC-insured up to $250,000, so the money is protected up to that amount if the bank fails. However, CDs are generally considered less prone to fluctuations with respect to the original deposit when compared to money market accounts because the money is tied-up for a set period. This means less of a likelihood to withdraw and spend money, which can help save more in the long run.

When to Choose a CD or a Money Market Account

The decision to choose a CD or a money market account ultimately comes down to savings goals, time-frame, and liquidity needs. When looking to save money for a short-term goal or trying to access funds frequently, a money market account may be the best option. However, if looking to save money for a long-term goal and you are willing to lock in funds for a set period, a CD may be the better option. Additionally, if in possession of a large sum of money without the need to access for a set period, a CD may be a better option because of its higher interest rate and fixed interest rate.

To make the choice that is best, it’s essential to consider your financial goals and needs. If still unsure which account type is right, a financial advisor can help guide in making the best decision in unique situations.

In summary, money market accounts and CDs are safe savings options offering various benefits and drawbacks. Money market accounts offer more liquidity and flexibility, while CDs offer higher interest rates and a guaranteed rate of return. Ultimately, choosing a CD or a money market account comes down to individual savings goals, time-frame, and liquidity needs. By understanding the benefits and drawbacks of each option, a depositor can make an informed decision and choose the best account specific to needs.

At Amerant Bank, we understand the importance of finding the right savings option that fits your needs. Whether you are looking for higher liquidity or a guaranteed return on investment, our team of financial advisors can help you find the best fit for your specific situation. Contact us today or visit amerantbank.com and follow Amerant on Facebook, Twitter, Instagram, and LinkedIn @AmerantBank to learn more about which account would suit you best.

Amerant Editorial Team
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