While watching ABC’s The Bachelor, it’s not hard to mix up the 30 women on night one. There are several blonde Hannahs and even more blonde non-Hannahs. Adding to the chaos, there are also blondes whose names begin with the letter H.
Comparing money market accounts, money market funds, high-yield savings accounts, and certificates of deposit could send you into similar head spins. These four bank products sound similar but are not.
The one thing they have in common? They’re all places you can store your money to let it grow.
Whether it’s blondes on The Bachelor or places to put your money, it admittedly gets confusing. #reallifeapplication
But seriously, what are these things? And why should we care?
Storing Ur Cash Money
When you have money, you need somewhere to keep it. Preferably, somewhere that is safe and pays you interest.
Most of us store our money at the bank in a checking account and/or savings account. And for the most part, it’s great. They are nice to us and keep our money safe.
But are we settling? In this case, if low-risk, higher-interest = happiness, then the answer is yes. Because there are a couple of ways to earn higher in
Money Market Accounts
Money market accounts are super similar to savings accounts. The main difference? Money market accounts usually come with an ATM card and a checkbook, letting you withdraw directly from the money market account.
Traditional saving account funds can only be withdrawn via electronic transfer or a trip to the bank.
The other selling point of a money market account? Some offer much higher interest rates than savings accounts.
Rates really depend on the institution. Bigger banks like Chase and Bank of America do not offer higher interest-rate money market accounts. Online banks like Ally, Capital One, Discover and others offer higher rates that currently are sitting around 1.95% – 2.00%. For comparison, Chase’s savings accounts offer a 0.01% interest rate.
On a $1,000 deposit, that’s the difference between earning $20 vs 1 cent of interest over a quarter. Money market accounts = more cheddar earned.
Main Features of Money Market Accounts:
- May have minimum deposit amount
- FDIC-insured (means if the bank goes bankrupt, the gov. will reimburse you)
- “Traditionally” have higher interest rates than savings accounts
- Limit the # of monthly withdrawals
- Come with ATM card / check-writing ability
The Other Blonde: High-Yield Savings Accounts
The financial industry
High-yield savings accounts work the same as traditional savings accounts. They just offer higher interest.
Unlike money market accounts, they don’t come with an ATM card or check-writing ability.
Sometimes high-yield savings accounts offer slightly higher yields than money market accounts. For example, a Discover money market account could have a 1.95% interest rate, while its online savings account offers 2.10%. The reason? In exchange for less access to your money, you get more interest.
Money Market Funds
If money market accounts are Bachelor contestant Hannah A., a nice dental hygienist from Chicago, IL, then money market funds are Hannah Z., a boisterous “dog-enthusiast” from Los Angeles, CA. You’re kind of like…what do you actually do though?
Good question. Money market funds are not FDIC insured and they do not provide a guaranteed rate of return. They are a type of open-ended mutual fund that invests in very short-term, high quality investments. Think US Treasury Bills and commercial paper.*
*Commercial paper = Overnight loans large companies will take from banks to cover expenses and then pay back, with interest, usually no more than 270 days later
Since money market funds invest in liquid assets (aka investments that can quickly be turned into cash), they are thought of as low-risk investments. Unlike having an account through the bank, the return rate is generated by the fund’s performance and changes as the broader market changes.
With savings accounts, banks decide the interest rate and could keep them stagnant even when rates rise. (Although saving account rates are also not guaranteed.)
Theoretically, money market funds sound like a good investment. But because they are mutual funds, you still will pay management fees that eat into your return.
In today’s interest rate environment, money market fund returns are generally not better than what you get with a high-yield savings account, money market account or certificate of deposit.
For the average investor, money market funds aren’t an attractive investment.
“Hannah Z., I’m sorry.”
Certificates of Deposit
Certificates of deposit, aka CDs, are the equivalent of locking your money in a safe and giving the key to a bank. After a set period – 3 months to 5 years – you get your money back, plus interest. If you withdraw the money before the time period ends, you pay the bank a fee.
It’s just like when Bachelor contestants lock up their cell phones before they enter the mansion. When they leave the show, they get their phone back, plus 50,000 new Instagram followers. #stretchingthisanalogytoofar? #sorrytoanyonewhodoesntwatchbachelor #butlikewhydontyou
Anyway.
CDs typically offer higher interest than money market accounts or high-yield savings accounts. If you have savings you don’t plan to touch for the next couple of months or five years, you could deposit them into a CD and earn higher interest than keeping it in a savings account.
Rates & Duration
CDs, like savings accounts and money market accounts, are a bank product. Banks decide how much interest to offer on their products. If interest rates move, the bank might change their rate too. But when you open a CD account, you lock in a rate for the entire period. With savings accounts and money market accounts, you aren’t guaranteed to always have the same rate.
When deciding on a CD duration, consider whether interest rates are expected to rise. You might be better off selecting a shorter-term CD and reinvesting in a year at a higher rate. For example, since the Federal Reserve plans to continue increasing rates into 2019, CD rates could go up later this year.
CDs are FDIC-insured and can be great low-risk investments for super risk-adverse investors.
RECAP
Money market accounts, high-yield savings accounts, and certificates of deposit offer low-risk ways to earn higher interest than traditional savings accounts.
Interest rates will depend on the financial institution (the big guys don’t have the best rates; online banks offer higher rates) and interest rate expectations.
Money market funds are a type of mutual fund that allows you to invest in short-term liquid investments. They are considered to have low volatility and be generally low-risk. They have fees and are not FDIC-insured.
The Bachelor airs Monday nights on ABC.
