What is the difference between a money market account and a money market fund?

A money market account (MMA) is a deposit account offered by banks and credit unions, insured by the FDIC or NCUA, and typically offers a variable interest rate with limited transaction privileges. A money market fund is a type of mutual fund that invests in highly liquid, short-term debt instruments, such as Treasury bills and commercial paper. While generally considered low-risk, money market funds are not FDIC or NCUA insured, meaning there's a very small, though rare, risk of losing principal.

Are CDs and money market accounts safe?

Yes, both Certificates of Deposit (CDs) and Money Market Accounts (MMAs) are considered very safe. They are insured by the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA) for credit unions, up to $250,000 per depositor, per institution, per ownership category. This federal insurance protects your principal even if the financial institution fails.

What happens if I need to withdraw money from a CD early?

If you withdraw money from a traditional CD before its maturity date, you will typically incur an early withdrawal penalty. This penalty usually involves forfeiting a certain amount of interest (e.g., 3 or 6 months' worth), and in some cases, it could even reduce your principal if you withdraw very early or if the interest earned is less than the penalty. Some CDs, known as "no-penalty" or "liquid" CDs, allow early withdrawals without penalty but often offer lower interest rates.

Can I write checks from a money market account?

Yes, most Money Market Accounts (MMAs) offer limited check-writing privileges. You can typically write a certain number of checks per statement cycle, often up to six, though this limit can vary by institution. MMAs also frequently come with a debit card for ATM withdrawals and electronic transfers, providing more liquidity than a CD.

Are the interest rates on CDs and MMAs fixed or variable?

The interest rate on a Certificate of Deposit (CD) is typically fixed for the entire term of the CD, meaning it won't change until maturity. The interest rate on a Money Market Account (MMA) is usually variable, meaning it can fluctuate over time based on market conditions and the financial institution's discretion.

How do I choose between a CD and an MMA?

Choose a CD if you have a lump sum you won't need for a specific period (e.g., 6 months to 5 years) and want a guaranteed interest rate. CDs are ideal for specific future goals like a down payment. Choose a Money Market Account (MMA) if you need more liquidity for your savings, such as an emergency fund, or if you anticipate needing occasional access to your money. MMAs offer competitive, variable rates and some transaction flexibility.

What is a CD ladder and why should I use one?

A CD ladder is a strategy where you divide a lump sum of money and invest it in multiple Certificates of Deposit (CDs) with staggered maturity dates (e.g., 1-year, 2-year, 3-year CDs). As each shorter-term CD matures, you reinvest the funds into a new, longer-term CD. This strategy provides regular access to a portion of your funds (liquidity) while allowing you to benefit from the higher interest rates typically offered by longer-term CDs. It also helps to mitigate interest rate risk.

CDs vs. Money Market Accounts: Safe Savings Guide | One…