When it comes to savings, it’s safe to say everyone wants their accounts to compound faster than Usain Bolt, right? If you consider all the variables in terms of managing your money, savings accounts can be a tricky thing to truly master. We all have everyday expenses plus things that come up suddenly. So, not all of us are prepared to commit to saving as much as possible. However, smaller increments could pay of heavily over time.
You do have options for savings accounts, and the one you choose should align with your overall financial goals. If you want to take savings seriously, you might want to look at either a money market, a standard savings account, or a CD (Certificate of Deposit). Both function differently, and it’s important to know the difference. Here’s what you need to know about these three different and what they can be used for.
Savings Accounts and Money Markets
If you bank with a credit union or national bank, you might be offered a money market on top of your standard savings account. They’re simple to understand; you put money in and it accrues interest over time. The interest rate on each differs, but money markets often have a higher interest rate. What’s best about these accounts is that you can withdraw the money at any time. So, there are few things that are best-suited for this kind of account, such as:
- Emergency fund
- Everyday savings
- Big purchases
- Vacation money
If you’re looking at a shorter term savings strategy, these accounts will work best for you.
Certificate of Deposit
Now, these accounts are more for long-term savings. One advantage over standard accounts is that CDs have much higher interest rates, so your deposit will grow substantially over time. However, those funds are not easily accessible. When you sign up for a CD, you agree to a fixed term, most often 9, 12, or 24 months. If you try to take out the fund before the maturity date, you could be subject to penalties.
Since it’s a long-term investment, CDs are more suited for:
- Tuition money
- Retirement
- Down payments
- Big Purchases
- Child’s future funds
Of course, with enough capital, you can use both of these accounts to your advantage. It all depends on how much you’re willing to put away as long as it doesn’t interfere with daily expenses.