Checking accounts
A checking account is a deposit account (a bank account in which customers deposit and withdraw funds). For many of us, a checking account is the first bank account we open, and for good reason. Checking accounts provide a great way for us to manage our short-term expenses. Whether we use checks or an ATM/debit card, a checking account makes it easy to pay for groceries, gas and bills, and it gives us easy access to our money when we need it.
Learn more aboutchecking accounts.
Savings accounts
A savings account – like a checking account – is a deposit account in which customers deposit and withdraw funds. True to its name, a savings account is a safe place where you can save your money and typically earn more interest than with a checking account. However, you won’t earn as much as with CDs, money market accounts or investment accounts. As a result, a savings account is a good first step toward building a nest egg, but the more wealth you build, the more you’d want to look at other options that generate greater returns on your investment.
Learn more aboutsavings accounts.
Money market accounts
A money market account (MMA) is a deposit account that has features of a savings account and a checking account. For example:
- You can write checks and use a debit card for spending or paying bills. (like checking accounts)
- You may be limited to six withdrawals per month. (like savings accounts)
- MMAs are insured by the FDIC or National Credit Union Share Insurance Fund for up to $250,000. (like checking and savings accounts)
- You can earn interest on balances. (like checking and savings accounts) In fact, money market rates tend to be higher than checking and savings accounts, but they might require a higher initial deposit and a higher minimum balance.
Certificates of deposit (CDs)
NOTE: CDs are offered by banks. Credit unions offer a similar deposit account, which is known as a certificate. The following summary about CDs applies to credit union certificates, too. Learn about Affinity Federal Credit Union certificates.
CDs are deposit accounts that generate interest, and they last for a preset length of time. (This is known as the CD term.) CD terms can range from a few weeks to 10 years or more. Longer terms usually mean higher APYs (more earned interest). Anyone who opens a CD does so with the understanding that they’ll leave the money in the CD for the entire term. The day the term ends is known as the maturity date. On that date, you get back the money you deposited plus all earned interest.
If you withdraw money from the CD before the maturity date, you can trigger an early withdrawal penalty. Banks and credit unions have different penalties in place, but generally speaking, the early withdrawal penalty can be a flat fee, a percentage of interest earned, or worst of all, you could lose all the interest earned. That’s why you should always read the fine print on the CD account’s terms before opening one.
Should I put my extra money in a savings account, MMA or CD?
Although all three are great options as you work toward your saving goals and maximize your earnings, think about when you’ll need access to the money.
Choose a savings account if you’ll need the money soon: If you’re saving for an imminent expense, like an upcoming vacation, go with a savings account. You won’t earn as much interest, but you’ll spend the money soon anyway.
Choose an MMA if you won’t need the money for several months: MMAs work well for medium-term goals because they pay a higher yield. Plus, if an emergency occurs and you must access the money, there are no penalties for early withdrawals.
Choose a CD if you won’t need the money for a year or longer: CDs make sense for long-term goals, like buying a house. Just be sure you won’t need to spend the CD funds until after the CD maturity date. Otherwise, you will have to pay penalties and/or lose the earned interest. That’s why CDs might not be the best choice for emergency funds. Consider savings accounts or MMAs for your emergency fund instead.
