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Money Market Accounts & CDs

Yep, this stuff is pretty boring, but that doesn’t mean you shouldn’t know what these are.

So read below about money market accounts and CDs (and we’re not talking about those things from the 90s).

What is a Money Market Account?

  • A money market account (also called a money market deposit account or MMDA) is a deposit account that offers higher interest than a regular savings account. It also typically has a higher minimum deposit requirement and may also have a higher average daily balance minimum.
  • Most money market accounts offer check-writing privileges, but the number of checks allowed per month is limited.
    • Money market accounts have the same transfer and withdrawal limits as savings accounts.
    • Under federal regulations, certain types of transfers and withdrawals are limited to no more than six per calendar month or statement cycle.

Money market accounts should not be confused with money market funds.

  • A money market account at an FDIC-insured bank pays a specified interest rate and is FDIC-insured.
  • A money market fund is a mutual fund that carries risk and is not FDIC-insured.

What is a Certificate of Deposit (CD)?

  • A certificate of deposit is a timed deposit that has a fixed rate of interest and a fixed maturity date.
  • In exchange for a guaranteed, fixed rate of return, you make a commitment to keep your funds in the CD for the full length of the term.

Features of CDs

Interest

  • The interest rate on a CD is typically higher than the interest rate paid on savings or money market accounts (especially for terms greater than 1 year).
  • CD rates can vary widely from bank to bank, so you should comparison shop before you put your money in a CD.

Term

  • Common CD time periods are from six months to five years, with higher interest rates paid on the longer-term CDs.

Penalties

  • Although you can withdraw your funds before the maturity date, you will pay a penalty (which can be steep).
  • Penalties can be expressed as:
    • a number of months’ worth of interest;
    • a percentage of principal; or
    • a percentage of the amount withdrawn.
  • Larger penalties can be assessed for withdrawals on longer-term CDs.
  • If you absolutely need to withdraw your funds before the maturity date, make sure you read the fine print. Then you can factor in the penalties before deciding whether to withdraw early.

Renewal

  • A CD may automatically renew upon reaching the maturity date. Therefore, it is important to know the specific renewal terms that may that apply to your CD.
    • If you don’t want to reinvest your money in another CD with the same term, you should notify your bank before the renewal date.

CD Ladders

  • To avoid tying up their money in a long-term CD, some people set up “CD ladders.” This means investing in a number of CDs of different term lengths so that the CDs mature periodically.

FDIC Insurance