What is a better investment than a money market account?
Money market accounts (MMAs) and certificates of deposit (CDs) are types of federally insured savings accounts that earn interest. But their rates and ease of access differ. CDs tend to have higher rates than money market accounts and give no access to your money until a term ends.
Both CDs and money market accounts are safe investments. They typically include FDIC insurance and don't involve the purchase of securities that may fluctuate in value. The only situation in which your investment could be at risk is if the financial institution at which you open the account declares bankruptcy.
Money market accounts generally don't require a trip to the branch to tap into your cash. With savings accounts, you'll access funds in one of two ways. You can make an in-person visit and complete a withdrawal form, receiving a check or cash for the amount you want to withdraw.
Institution | APY | Minimum Balance |
---|---|---|
Poppy Bank | 5.50% | $1,000 |
My Banking Direct | 5.35% | Any amount |
BrioDirect | 5.35% | $25 |
Vio Bank | 5.30% | Any amount |
CDs generally offer higher interest rates compared with money market accounts. Money market accounts provide access to funds and offer interest rates similar to regular savings accounts. CDs earn more interest over time but have restricted access to funds until maturity.
Fees and APYs
Typically, a brick-and-mortar (or traditional) bank's money market account has higher monthly service fees but offers a better interest rate compared to its savings account.
If inflation is rising, it could outpace the rate of return you're earning on your CDs, especially in a low interest rate environment. This means even though your savings is growing, it won't stretch as far when it's time to spend it. Notably, this is also a risk when keeping money in savings and money market accounts.
Many accounts have monthly fees
Another drawback to remember is that while they have high yields, money market accounts can also come with cumbersome fees. Many banks and credit unions will impose monthly fees just for the upkeep of your account.
Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.
Some money market accounts come with minimum account balances to be able to earn the higher rate of interest. Six to 12 months of living expenses are typically recommended for the amount of money that should be kept in cash in these types of accounts for unforeseen emergencies and life events.
Should I move my savings to a money market account?
If the saver is able to meet the minimum balance, doesn't anticipate needing the funds anytime soon, and is interested in a higher interest rate, a money market account is the better choice.
So, your money is never really stuck. However, MMAs sometimes charge small penalties if your balance drops below a certain amount or you make more withdrawals than agreed. So, you may withdraw your funds at any time, but some withdrawals can lower your money's earning potential.
As of writing, no U.S.-based banks are offering a 7.00% APY on a savings account. For high-yield savings accounts — top, competitive rates are more in the 5.00% APY range. However, Landmark Credit Union currently offers a Premium Checking account with a 7.50% APY on balances up to $500.
Savings Account | APY |
---|---|
CIT Bank Platinum Savings | 5.05% APY on balances of $5,000 or more; 0.25% APY on balances under $5,000 |
Salem Five Direct eOne Savings | 5.01% APY |
Laurel Road High Yield Savings® | 5.00% APY |
Wealthfront Cash Account | 5.00% APY |
There is no direct way to lose money in a money market account. However, it is possible to lose money indirectly. For example, if the interest rate you receive on your account balance can no longer keep up with any penalty fees you may be assessed, the value of the account can fall below the initial deposit.
However, stocks are much better than CDs for long-term investors who have the time to ride out short-term losses. An investor in blue-chip stocks will probably end up with a far larger balance than an investor in CDs.
CD interest is subject to ordinary income tax, like other money that you earn. The IRS requires investors to pay taxes on CD interest income. The bank or financial institution that holds the CD is required to send you a Form 1099-INT by January 31.
Because they invest in fixed income securities, money market funds and ultra-short duration funds are subject to three main risks: interest rate risk, liquidity risk and credit risk.
Saving is generally seen as preferable for investors with short-term financial goals, a low risk tolerance, or those in need of an emergency fund. Investing may be the best option for people who already have a rainy day fund and are focused on longer-term financial goals or those who have a higher tolerance for risk.
What are 2 drawbacks of putting your money in a CD?
CDs offer higher interest rates than traditional savings accounts, guaranteed returns and a safe place to keep your money. But it can be costly to withdraw funds early, and CDs have less long-term earning potential than certain other investments.
CD rates may not be high enough to keep pace with inflation when consumer prices rise. Investing money in the stock market could generate much higher returns than CDs. CDs offer less liquidity than savings accounts, money market accounts, or checking accounts.
Interest rates for short-term CDs are very high right now – but they might start to go down soon. Putting $10,000 into a short-term CD right offers solid – if perhaps not spectacular – returns for virtually no risk. If you have money you don't think you'll need to access imminently, a short-term CD is a great choice.
Money market accounts tend to pay you higher interest rates than other types of savings accounts. On the other hand, money market accounts usually limit the number of transactions you can make by check, debit card, or electronic transfer.
Certificates of deposit (CDs)
If you withdraw the money before the CD matures, expect to pay a penalty. Depending on the size of the CD, you can earn a higher APY than you would with a savings account or money market account.
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