Money market deposit accounts and CDs

Certificates of deposit

Instead of parking the majority of your cash in a savings account, you could open a certificate of deposit (CD). When you open a CD, you agree not to withdraw your money for a period of time ranging from three months to five years or more. The shorter the term of the CD, the lower the rate you'll get.

If interest rates fall, you're in luck because the bank must give you the rate it quoted when you bought the CD. If rates climb, however, you're stuck with the rate you agreed to even though it's lower than one you could get if you bought a new CD.

You can get money out of a CD prematurely, but you'll pay a penalty -- typically three months' interest. If you have more than $100,000, you can put it into a so-called jumbo CD that pays even higher rates.

However, any amount over $250,000 isn't insured, so the excess is only as secure as the bank itself.

When opening a CD, be sure you understand whether the rate is fixed or variable, and how often the interest compounds. A CD interest rate can yield different sums of money depending on whether a rate is compounded daily, weekly, monthly, quarterly, or yearly.

Banks can quote rates that compound daily, weekly, monthly, quarterly, or yearly. Over a period of 12 months, interest that compounds yearly could yield less money than a lower interest rate that compounds daily. To compare how much money you'll earn from various accounts in a year, ask for each account's "annual percentage yield" in addition to its interest rate. Banks typically quote both interest rates and APYs, but only APYs are calculated the same way everywhere.

Money market deposit accounts

Banks also offer money market deposit accounts, which invest your money in short-term loans to government agencies and corporations. Typically, they require you to maintain a minimum balance. Because the minimum is typically high, a money market account is often free, and you're likely to get free checks to write against your account's balance. However, there may be a minimum check-writing amount, and you may be limited to the number of checks you can write a month.

To see how quickly your money will grow in an interest-bearing account, try our savings calculator.

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