CDs and Money Market Accounts Explained
If you’re looking to grow an emergency fund, or have some extra cash that you can set aside to earn more interest than a typical checking or savings account, you may want to consider a money market account or certificate of deposit. These savings options can offer a bigger bang for the buck than a standard savings account, and are easy to apply for online. Here are the basics of CDs and MMAs and how they can benefit you and your savings goals.
What is a Certificate of Deposit or CD?
A certificate of deposit, or CD for short, is a smart savings option where you agree to deposit a minimum amount of money for a specific period of time. In exchange, you’ll receive higher interest payments, typically higher than money markets and traditional savings accounts. Another benefit to a CD is that it’s backed by FDIC insurance, so your money is not at risk like it would be in the stock market.
You choose the length of the term, which can range from months to years, and earn interest when your CD matures. If you withdraw money before the maturity date, most banks will issue an early withdrawal penalty, so it’s wise to not choose this savings vehicle if you think you’ll need to tap into your cash frequently.
CD Laddering Strategy
If you don’t want to tie up too much of your savings into one CD, you may want to consider laddering CDs. This practice is a way to spread out your investment over multiple CDs with different maturity dates. Then, when your CD matures, you can reinvest the money into another CD you have with a longer term, or take the payout.
Here’s an example of how you could ladder several First Federal Bank CDs:
- 18-month CD: $5,000 at 1.43% APY*
- 25-month CD: $5,000 at 1.50% APY
- 42-month CD: $5,000 at 1.47% APY
- 60-month CD: $5,000 at 2.02% APY
*Annual Percentage Yield
After month 18, you’ll have grown your first $5,000 to $5,108. You could then deposit that money into a 60-month CD that earns 2.02% APY, or keep that money. Once your 25-month CD matures, you can reinvest that money into another CD with a higher interest rate to keep the ladder going. The idea is to stagger the CDs and maturity dates so you always have money invested and funds that become available without penalty at different times for any unforeseen events.
At First Federal Bank, you can open a CD for a little as $500, and our terms range from three months to five years. Use our Certificate of Deposit Calculator to see how much you could earn with your savings. Check out our current CD rates and promotions and then apply for a CD online.
What is a Money Market Account or MMA?
Another savings option that not many people understand fully is a money market account. Money market accounts are a great option if you want to earn a higher interest rate but still want access to your money in case of a plumbing disaster or auto repair bill. In fact, experts say money market accounts are an excellent place to stash money for emergencies. Money Market Accounts offer the opportunity to earn higher interest than a regular savings account and give you the convenience of access by check.
In exchange for this better rate, some banks impose minimum balance requirements and maintenance fees, and all banks are bound to only allow six electronic withdrawals each month due to federal regulations. Like a more traditional savings account, money market accounts offer no risk of losing your money, as compared to an investment in stocks and bonds, and you don’t have to find a stockbroker to get started.
At First Federal Bank, our money market accounts don’t have any minimum balance requirements or maintenance fees. Plus, you can quickly branches in OH, MI or IN, or contact us at your convenience.