Why would I want a money market over a CD or vice versa?
May 26th, 2010
I’m 25 and have been saving into a money market – I have about 15k and should have close to 50k by the end of the year. I get like 2.2% on my savings in the MM. I am most concerned about the security of the funds with the way the economy is. If everyting were to go to hell I want my money to be safe.
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The main difference between the two is the amount of money you earn, and how easily you can get at the money if you need it. MMs typically pay a little less, because you can get at it anytime for almost no penalty. CD’s pay more, but they are locked in for a period of time, and you can’t get them back out without a penalty.
Also, there lock-in isn’t always bad. For example, say you had $5,000 to invest. You can either put it in a money market paying 3.5% or a CD paying 3.75% but locked for 12 months. If you buy the CD and the rates later drop to 3%, you are happy, but if the rates increase to 5% you are sad.
If you buy the MM and the rates increase to 5% you are happy, but if they fall, you are sad.
Either of these are safe as long as you stay below $100,000 in any one bank.
A solution you might want to consider is a CD ladder. This means you take that $50,000, and keep $5,000 in a MM account, then spread the rest out CD’s that mature in 3 months, 6 months, 12 months, 24 months. As each CD matures, you either renew it (if rates look like they will fall) or move it to MM if rates look like they might be going higher.
Congratulations for saving a lot at a young age. As you educate yourself, you might want to look into some stock, bonds and other kinds of investments. CDs and MMs are very good for safety, but over the long run, inflation will eat away at your earnings.
Money market accounts are not always insured.
CDs are insured.
I would guess that your bank/brokerage is FDIC insured for all deposits that are cash (CD, Money Market, regular savings, etc). Stocks or other equities don’t count. Just make sure the bank is FDIC insured (good for up to 250k).
The advantage of a money market over a CD is that you can withdraw without penalty, where a CD has a penalty if you withdraw before it matures, but you get a slightly higher return. You should have a mix – if there is a set amount of money you are ‘pretty sure’ you won’t need for a while, then put that amount into a CD. Don’t be tempted to buy a CD any longer than 12 months, since if the rates go back up you will be locked into the lower rate.
I want to know how you are turning 15k into 50k by the end of the year.