Many people struggle with whether to invest in a money market account or a certificate of deposit (CD). If you are one of these people, the first question you should ask yourself is, “What is the purpose of the money I’m investing?” Your answer will most likely fall into one of the following categories…

• “I want to be able to access my money in an emergency.” If this is your answer, you’re probably better off looking at a money market account. While your interest rate might be a little lower, money market accounts are set-up so that you can readily access your funds (you can search for the best interest rates at Bankrate). Most even come with a check writing capability. Be careful though, most money market accounts only allow 3 - 6 transactions a month. Any more than that and you’ll be hit with a service fee. Other considerations are that money market accounts typically mature within 1 year or less and most require a minimum balance of $2,500 or more (dropping below the minimum required balance will result in a penalty, usually $10 a month as long as it stays below the required minimum balance).

• “I don’t need quick access; I just want a good return on my money.” If this is your answer, you might want to look into a CD. CDs generally range from 3 months - 5 years. Once the account matures, you can cash out or roll it over into another CD (I like to use ING DIRECT for their Orange CDs). The longer the term is, the higher the interest rate will be. This is because the longer the bank can hold your money, the more profit they can make by lending it to other customers. Be cautious though, chasing the higher interest rates of long term CDs can backfire if you end up cashing out before the maturity date. Accessing these funds early comes with a penalty in the form of losing interest already acrued in the account.

Enjoy this article? Subscribe to the RSS feed!