Choosing the Right Account: CDs, Savings, or Money Market Accounts

Finding the right deposit account for your financial needs and goals can be fairly easy once you educate yourself a bit about the different kinds of bank accounts.

A savings account can be opened at a bank branch or online through a large host of banks.  They offer an interest rate higher than checking accounts, with easy access to your money.  You can access your account online or with a debit card.  In exchange for this access and good liquidity, the interest rates are lower than other kinds of accounts.

The money market account allows you to deposit a large amount of funds into an account.  However, this account is best if you keep transactions to a minimum.  Many banks limit the amount of withdrawals you may make.  The interest rates are generally higher than savings accounts because the money you deposit is then invested by the bank in low-risk government T-bills.  Though withdrawals are limited, it is easy to access your money at any time and deposits can be made easily at any time.  An important aspect of money market accounts is the minimum balance requirement.  You balance may incur fees or influence your interest rate.

CDs offer a high interest rate in exchange for lending your money for a set length of time, usually one to five years.  The CDs high interest rate is certainly a plus, but the trade off is that you cannot access the money without a penalty fee.

So which account is best for you?  There are a few things to consider before deciding:

1. If you want easy access to your money, you will probably want to avoid a CD.  If you wish to have access to ATMs and bank tellers, a savings account may be best.
2. If you wish to invest a larger amount of money, a money market account or CD may work for your needs.  Consider how much you are willing to put away.
3. Consider how soon you need your money.  If you want your money sooner than later, a 5 year CD is probably a poor choice.  But remember if you can afford to leave it untouched, your return will be greater.
4. Researching interest rates is an important aspect of choosing an account.  Banks may offer promotions for their accounts and you may find that a high-yield savings will have a better rate than some shorter termed CDs.  Interest rates vary, so shop around.
5. Penalties and fees are a necessary evil with all accounts.  Consider them carefully.