The average rate of return on a money market account is just 0.06%, according to the Federal Reserve. In contrast, the average CD rate is currently around 1.3%. That may not seem like much, but it can make a big difference over time especially if you have a large sum of money invested. Here are a few reasons why CDs may be a better investment than a money market account:
CD Rates are Much Higher
CD rates are usually around 1% higher than the interest rates on money market accounts. This is because CD rates are based on the Prime Rate, which is the rate at which banks lend money to their best customers.
The Prime Rate is currently 3.25%, so CD rates are currently 4.25%. Money market account rates are based on the Federal Reserve's target rate for overnight loans, which is currently 0.25%. That means that CD rates are currently 4% higher than money market account rates. There are a few reasons why CD rates are better than money market account rates.
First, CD rates are guaranteed for the length of the term. That means that if the interest rate goes up, your CD rate will stay the same.
Money market account rates can change at any time, so you could lose out on earnings if rates go down. Second, CD rates are usually higher than money market account rates. That means you'll earn more interest on your CD than you would on a money market account. And third, CD rates are typically fixed, while money market account rates can be variable. That means you'll know exactly how much interest you'll earn on your CD, which can help you plan your finances.
You can use a CD as Collateral for a Loan
When you want to take out a loan, one option is to use a CD as collateral.
This can be a good idea if you have good credit and can get a lower interest rate than you would with a secured loan. Plus, you won't have to worry about putting up your home or other assets as collateral.
Another benefit is that you can still earn interest on your CD even while it's being used as collateral. If you're thinking of using a CD as collateral for a loan, compare CD rates at banks and credit unions first. You'll want to find the institution that offers the best terms.
Once you've found the right CD, you can use it as collateral for a loan and enjoy the peace of mind that comes with knowing your assets are still working for you.
CD Terms are Flexible
When it comes to CD terms, you have much more flexibility than with a money market account. You can choose from a variety of CD terms, ranging from a few months to several years. This means that you can tailor your CD investments to match your financial goals.
For example, if you're looking for short-term savings, but the money market account you're considering only offers long-term terms, then you may not be able to use the account to meet your needs. CD terms are also generally more flexible than money market account terms when it comes to withdrawals. With a CD, you can usually make one or more withdrawals without penalty during the term of the CD.
With a money market account, on the other hand, you may be limited in the number of withdrawals you can make, and you may be charged a fee for making withdrawals. This can make it difficult to access your money when you need it.
CD terms are also generally more flexible than money market account terms when it comes to deposits.
With a CD, you can usually make deposits at any time during the term of the CD. With a money market account, on the other hand, you may be limited in the number of deposits you can make, and you may be charged a fee for making deposits. This can make it difficult to save money in the account.
CDs Typically Have no Extra Fees
Investing in a CD is a great way to grow your money without having to worry about fees eating into your returns. Unlike money market accounts, which can often have high fees, CDs typically have no fees associated with them.
This means that you can earn interest on your entire CD balance, rather than just the amount of money left after fees are deducted. This means that CDs can be a great option for people who are looking to grow their money without having to worry about fees eating into their returns.
Another reason that CDs can be a better option than money market accounts is that CD rates are often much higher than money market rates. This means that you can earn more interest on your CD balance, which can help you to grow your money more quickly.
CDs Offer FDIC Insurance
When you invest in a CD at a bank, your money is federally insured against loss of up to $250,000 by the Federal Deposit Insurance Corporation (FDIC).
Money market accounts are not federally insured. So if the financial institution where you have your money market account fails, you could lose some or all of your money. In addition to the federal insurance protection offered by CDs, many banks and credit unions offer additional deposit insurance through the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA). These government agencies insure deposits up to $250,000 per depositor, per institution.
If you have more than $250,000 in deposits at one financial institution, you may want to spread your money among several different institutions to make sure it's all insured.
While money market accounts have some benefits, CDs offer more flexibility and better interest rates. This makes them a better option for people who are looking to grow their money. Plus, with no fees associated with them, CDs can help you to keep more of your money.