Should I Invest in CD’s or Use a Money Market Account?
As someone who is early in their investing career, I’m someone who probably plays it a little too safe when it comes to what I’m investing in. I have a few hundred dollars in bonds, $500 in a rotating CD, and a nice chunk of change in a Money Market account. I haven’t started playing the stock market yet, but one day soon I definitely will be.
So, on that note, I’ve had a handful of people ask me recently if I would recommend a money market account or a CD for investing small amounts of money ($500 to $2000). Yes, I know, it’s totally low risk, but people ask anyway! My answer? Not necessarily. Today, I’m going to explain my thoughts on this using a few different scenarios.
Saving short term. Money market. If you’re saving for the short-term (only a few months as opposed to 6 or more), I would make your money sit in the money market instead of a CD. If for any reason you’d have to take it out, you wouldn’t have to deal with any potential penalties or fees that taking money out of a CD early would accrue. Also, 3 month CD’s and Money Market accounts usually accrue interest at almost the same rate, so why waste the time putting the money into a CD?
Saving long term. This differs. If you know the amount of time that you want to keep your money in the account, then I definitely recommend using a CD. The interest will be more (if it’s a 6 month CD or longer) and you won’t be able to touch the money without consequences. If you’re using it as a general savings account, then you probably want to keep it in a money market account, even if the interest is less.
Saving in a shaky economy. Watch your financial institution’s money market interest rates. If these differ too much from CD’s, you may want to ask yourself why you are saving the money in the first place and if investing in a CD would make your intent for that money difficult to achieve or cause you to get in trouble with those early withdraw fees. Also, if that money market interest is way too close to your savings account, unless you already have one in your name, it may not be worth the trouble of opening one up.
Basically, you need to ask yourself two questions: How important is the amount of interest I accrue, the amount of time I plan on investing the money, and the likelihood of you taking out the money earlier than you would expect to. Now, remember, I’m not a professional, this is only my opinion and from what I’ve learned in my own experience. Always talk to a financial professional before making any decisions about investments that could affect you in the long term. Until next week, spend smart, save smart!
