Savings, CDs and Money Market Funds Explained

Investing Advice

If you’ve been investing in the stock market for the last couple of years, you’re probably feeling like you’ve been taken for a dizzying roller coaster of a ride. Head still spinning? The more stable investment vehicles, Savings accounts, CDs, and Money Market funds can provide some relief. While they may not offer the highest interest rates available they do provide an appealing safety cushion in times of economic uncertainty. And when it comes to saving for retirement, sometimes slow and steady can win the race. Let’s start off by explaining the basics of some of the most popular investment vehicles available to you.

Savings Accounts

The good thing about a savings account is that you have access to your cash whenever you need it and if you open a savings account that gains interest, you will be making money off the money you are saving. Now, let’s be honest, the interest you will earn might not be very high, depending on the bank you choose it will vary, but it’s better than having the funds in a non-interest bearing account that just sits there. Typically, a bank requires the holder of the account to maintain a minimum balance of $25 to $100. No fees are assessed as long as the minimum is maintained. The national overnight average at the time this article was written was 1.42% for savings accounts. Don’t forget that interest on your savings account has to be reported as income on your federal and state returns because interest earned on this account is taxable.

Each bank has its own set of policies, but in general, fees and penalties might apply for excessive or early withdrawals, inactive accounts and maintenance. You might also see added charges for requests such as account information by telephone, by computer or in person and ATM transaction fees, so please be sure to read through the information you receive from the institution when you open an account. It will list all costs and penalties you might incur. Better yet, read over the information on fees and penalties on the bank’s website or ask for this type of information from the banks’ representative before committing yourself to any one bank.


A certificate of deposit is the type of instrument you buy when you want to earn interest on your funds while they are “locked” for a fixed period of time. The amount you need to purchase a CD ranges from $100 to $100,000. The fixed period of time could be anywhere from 7 days to 10 years and interest earned on the CD is typically a fixed rate for the entire term of the deposit. The longer the term of the CD you purchase, the higher the interest rate will be. At the end of the term when the CD matures, the holder of the CD will collect both principal and interest accrued. CDs are insured through the Federal Deposit Insurance Corporation and the National Credit Union Share Insurance Fund (NCUSIF) if bought through a depositing institution that is insured. The NCUSIF is administered by the federal National Credit Union Administration agency. It insures member savings in federally insured credit unions, just look for the NCUA logo. Make sure the institution you are buying from is insured by either of these organizations. When shopping around for CDs you might come across different types. Here are the basic ones you’ll find.

Variable CDs

This type of CD is also called an adjustable-rate CD, its interest rate is adjusted up or down periodically. The holder of the CD is allowed to lock a rate at anytime before it matures.

Bump-up CD

Allows the holder of a CD to increase or bump up the interest rate to the higher market rate once or twice depending on the bank and keep it at that rate for the duration of the CD even if the rates drop again.

Brokered CDs

These are CDs bought in volume by brokerage firms that find the best CD rates available and resell them to individual investors. The amount varies by bank but usually, there is a minimum required amount of lets say $10,000, in order to purchase a brokered CD.

Uninsured CDs

Uninsured CDs are actually investment certificates and not the regular CDs that are most commonly refered to as basic certificates of deposit. These financial instruments are not insured and can be recalled by the issuing institution and reissued at a lower interest rate right before it matures. You might recall recently, Robert Allen Sanford, chief of Sanford Financial Group was accused by the SEC for misrepresenting the safety and liquidity of uninsured CDs.

Callable CD

This type of CD gives the issuing bank the right to terminate (call) the CD after a set period of time if interest rates fall. If this happens, you will receive your principal plus unpaid accrued interest.  The advantage to buying this type of CD is that it tends to have a higher yield than a regular CD.

Money Market Accounts

Money market accounts are high interest earning accounts. These typically pay a higher rate than regular savings accounts and are offered in a variety of ways. There are two government insured money market accounts. One is the super NOW account and the other is the money market deposit account.

Super NOW Accounts

Super NOW accounts have limited checking privileges. Minimum initial deposits range from $1,000 to $2,500. If your balance falls under the required minimum, the interest rate earned decreases to the lower level of a regular NOW checking account. You can only withdraw your funds through a check, electronically or with a debit card.

Money Market Deposit Accounts

This type of account has a minimum required balance and varying (tiered) interest rates based on the size of the account balance. You will have different fees for transactions and account maintenance depending on the bank you choose. Although these accounts pay a higher interest than the super NOW accounts, if your balance falls below the required minimum, the interest rate will also drop to the lower rate of the regular NOW checking account.

Money Market Mutual Funds (MMMF)

The government does not insure these accounts just as stock market investments are not insured. The account is held in a mutual fund investment company that brings together the cash of many investors. This money is then invested in debts and short-term maturities of less than one year. The interest earned by these accounts is generally higher then all the other money market accounts and interest is earned daily. Usually there is a minimum check limit of $200, which means that if you want to withdraw some of your funds, you have to withdraw at least some of the amount set by the bank. Several banks don’t have this requirement so make sure to shop around.  So when shopping around for the next safety cushion, do your research and read all the information you can get your hands on before signing on the dotted line.

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