A Certificate Of Deposit Versus A Money Market Account: Major Differences That Make A Difference In Your Future

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A Certificate Of Deposit Versus A Money Market Account: Major Differences That Make A Difference In Your Future

3 December 2015
 Categories: Finance & Money, Blog


There are any number of ways you can invest your money for the future. Two of those ways, a money market account and a certificate of deposit (or CD) rely heavily on the accumulated interest they receive and the interest rate at which banks and credit unions are willing to pay. However, that is essentially where the similarities end. Investing in one over the other can really impact your future goals. Here are three major differences between these two types of investments and how they affect your future goals.

Long-Term and Short-Term CD's Versus an MMA

A money market account is essentially a savings account with a higher required minimum balance and some of the benefits of a checking account, such as interest-bearing and interest accumulation. A certificate of deposit places money into a special account, one which limits the buy-in amount to a certain dollar. The CD has several more restrictions, which can be advantageous if you have a problem with saving money and are tempted to withdraw it from an MMA. There are also short-term CD's that allow you to earn a little extra cash in a much shorter time than traditional long-term CD's, which might be a good, middle-of-the-road option between buying CD's or opening an MMA.

Higher Interest Rates on CD's vs. Compounded Interest on MMA's

Much of the draw towards CD's has to do with the interest rates. The interest rates on CD's tend to be higher than those on MMA's (money market accounts). However, the interest garnered on MMA's is compounded, meaning you can earn interest on top of interest for as long as you own the account and keep it open. The interest rates on CD's are usually annual, and there are very specific terms on CD's that require you to keep them for some time in order to earn the full interest value.  You can draw the interest earned from an MMA at any time without punishment, unlike CD's which you cannot withdraw any interest until the CD has matured.

Adding Money to a CD versus Adding Money to an MMA

You cannot add money to a CD, but you can add money to an MMA. CD's are bought at face value to gain the promised interest at maturity, similar to buying bonds. MMA's, which are essentially savings accounts, always allow you to add more money, (up to $250,000 is insured by the FDIC) which continues to collect more interest. If you have more money that you would like to invest in CD's you will need to invest in short-term CD's with lower buy-in amounts, or wait until you have enough money stashed to buy into long-term CD's. In reality, an investment broker would tell you to invest in both, and if you cannot invest in both, invest in high-interest CD's over lower-interest MMA's. If you are curious about investing, contact a lender such as the Rio Grande Credit Union