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Understanding Certificate Of Deposit Better

Understanding Certificate Of Deposit Better Banking

If you are confused between CDs and Money Market then there are few factors to consider :

  • Time of Deposit: This is about planning your need for part or full cash requirements. Since there is no liquidity in CDs, one must plan about the length of the deposit. For example, it can be one deposit $25000 over 5 years or 5 deposits $5000 with returns in the 1st year, 2nd year etc. This is called Ladder CDs. In the case, money markets the fund is available to you without any fuss as there is flexibility with the fund, unless extreme cases.
  • Interest Rates: The anticipatory rates are the best way to invest in the short term or long term. If the rates are climbing, it is best to invest in short-term CDs, and if the rates are falling then invest in long-term CDs. You are known for your return and the tax bracket, you would fall into with CDs. However, in the money market, the interest rates vary over time since it is locked away like CDs.
  • FDIC Insurance: CDs are insured by FDIC for $250,000 while money markets are not insured. Since money market funds are offered by investment companies, there is a slim chance you could lose your money.
  • Maturity: In the case of CDs, the end return depends on the maturity while in the case of money markets it is about developed assets. Money markets are favorable to wealthy people.
  • Age of the Depositor: An elderly person should prefer a stable CDs to live out their life with pensions,401K etc. while a younger person might afford to take the risks in the money market. CDs are also taxable while Money market has tax-free securities and bonds which one can invest.

Both are useful financial tools, however, a person with capital might afford to put in money markets whereas people who want to lock away their savings could choose CDs. CDs are a safer option with lower returns while money market has risks with higher returns.

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