Home Finance Beginners Guide to Banking | The Motley Fool

Beginners Guide to Banking | The Motley Fool

by CoinNews

What is a certificate of deposit (CD)?

Best for: Those who want to earn a high interest rate and don’t need to spend that money anytime soon.

Not for: Those who think they’ll need to withdraw their money before the CD’s maturity date

A certificate of deposit (CD), also known as a share certificate if you’re using a credit union, is a special type of savings account that offers much higher interest rates — but there’s a catch. When you put the money into a CD, you’re agreeing that you won’t touch it for the length of the CD term. This can be anywhere from a few months to several years. Usually, the longer the loan term, the higher the interest rate. The best CDs can offer APYs of around 3%.

You can withdraw money from your account before it reaches its maturity date (the end of the CD term), but you’ll pay a high penalty. This is often a certain number of months’ worth of interest, and the farther away you are from your maturity date, the greater the penalty. A few CDs, known as no-penalty CDs, do not charge you if you withdraw your money early, but these usually have lower APYs than other types of CDs.

CD laddering is a popular strategy that lets you take advantage of the higher APYs offered by longer-term CDs’ while still giving you access to some of your funds every year. You start by investing your money into CDs with consecutive annual maturities — for example, a one-year, a two-year, a three-year, a four-year, and a five-year CD. When the one-year CD matures, you roll those funds into a new five-year CD. The next year, the two-year CD will mature and you put this into a new five-year CD as well, and so on. Every year, another CD will mature and you can withdraw the money if you decide or put it into a new one to keep growing your money.

Looking for a CD? Check out our list of the best CDs available now.

Interested in more info on CDs? We have a guide for that! Head over to our CD info page: What Is a CD?

What is a money market account?

Best for: Those who want to earn a high interest rate without sacrificing their easy access to their money.

Not for: Those with small savings who cannot meet the minimum balance requirements.

Money market accounts have features of all three of the bank accounts listed above. They keep your money fairly liquid, like checking and savings accounts, and they come with checks so you can withdraw money directly from the money market account. Some may also provide debit cards so you can withdraw money at ATMs or use your money market account to make purchases at stores or online.

Their APYs are often higher than savings accounts, in some cases they’re in excess of 2%, so they’re a wise choice if you hope to grow your money more quickly without tying it up in a CD for years at a time. But that’s not to say they’re without restrictions.

Money market accounts are also subject to Regulation D, like savings accounts, so you’re limited to six online or phone transfers and withdrawals per month. Checks also count toward your six convenient withdrawals per month, but ATM withdrawals do not. Another thing that may discourage some people from choosing an MMA is that these accounts usually have a much higher minimum balance than savings accounts, sometimes up to $5,000. Those without much money in their name may not be able to open one.

If a money market sounds like the right account for you, check out our list of the best money market accounts.

Source link

Related Posts

Leave a Comment