Whether you are saving up for your child’s college education or simply saving for a rainy day it is nice to actually earn interest on your fixed income investments. With the current interest rates for traditional savings accounts hovering around one percent many people find themselves searching for a better alternative.
When looking for the most profitable place to park your money it is important that you understand all of your options. Certificates of deposits (CDs) and money market accounts are great tools; but which one is a better choice?
Certificates of Deposit versus Money Market Accounts
When you invest in a CD you can typically expect to earn more interest than you can with a money market account. Furthermore, the average investor has greater flexibility to select a maturity that fits the investor’s savings requirements. You are free to invest for as little as thirty days or as long as ten years. Here are a few additional guidelines you should consider before you invest in CDs:
1. Early Withdrawal Penalties – One of the trade offs to receiving a higher rate of interest is that you agree to invest your money for a minimum period of time. If you need to withdraw your funds before the maturity date you may incur an additional fee.
2. Automatic Rollover – CDs are the perfect example of passive income. The only time you need to monitor them is as they approach their maturity date. If you do not actually contact your bank and instruct them with what they should do with your funds your bank may actually automatically roll your money into a similar CD, even if interest rates have increased.
Money market accounts work best for those investors that need immediate access to their funds. While the interest rates are typically much higher than those earned by traditional savings accounts there are a few things you need to consider before putting your funds into a money market account.
1. Minimum Balance Requirements – Unlike a typical savings account most money market accounts require a certain minimum daily balance. This may be as low as $500 or as high as $10,000; so check with your bank before opening an account. If your balance dips below the required level you may incur additional fees and penalties.
2. Excess Withdrawal Fees – The majority of money market accounts fall under Regulation D which serves to limit the number of withdrawals you can make each month. If you make more than six withdrawals in any given month you may incur additional fees.
Certificates of deposits and money market accounts can both be used to earn additional interest on your savings. Perhaps the best way to determine which one is best for you is to determine whether or not you need immediate access to your funds. If you value liquidity more than earnings a money market account would be best. If you do not need your money right away a certificate of deposit might just be the perfect investment option.