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Tag: High-yield Accounts

by Olivia Hughes - January 22, 2021

Money Market Account or Checking Account: Which Is Best For You?

If you’re looking for a new bank account that allows you to easily store as well as access your cash, you might be thinking about opening a money market account or checking account. But how do you know which to choose? Decisions, decisions. Both types of accounts have unique advantages, depending on your savings and spending goals.

“Think about how you will be using the money within the account,” says Jill Emanuel, lead financial coach at Fiscal Fitness. “Is this money for daily, weekly or monthly use? Or is it money that will not be needed regularly?”

When comparing a money market account vs. a checking account, consider how often you'll need to access the funds in the account.

You’ll probably need a little more to go on before answering the question, “How do I decide between a money market account or checking account?” No worries. Our roundup delves into the features of both types of accounts to help you determine which one could be right for your financial plans, or if there’s room for both in your money mix.

Get easy access to your funds with a checking account

In simple terms, a checking account allows you to write checks and make purchases with a debit card from the money you deposit into the account. That debit card can also be used to withdraw cash from the account via an ATM.

When deciding between a money market account or checking account, Emanuel says most people use a checking account for the primary management of their monthly income (i.e., where a portion of your paycheck is deposited) and daily expenses (often small and frequent transactions). “A checking account makes the most sense as the account where the majority of your transactions occur,” she adds. This is because a checking account typically comes with an unlimited number of transactions—whether you’re withdrawing cash from an ATM, transferring money to a savings account or swiping your debit card.

While a checking account is a good home base for your finances and a go-to if you need to easily and quickly access your funds, this account type typically earns little to no interest. Spoiler: This is one key difference when you compare a money market account vs. a checking account.

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“If you plan to use your account for monthly bill payments and day-to-day transactions, you would be better suited with a checking account, as these support daily and frequent use.”

– Bola Sokunbi, certified financial education instructor and founder of Clever Girl Finance

Grow your balance with a money market account

When you’re comparing a money market account vs. a checking account, think of a money market account as a savings vehicle that allows you to earn interest on the balance you keep in the account.

“A money market account is an interest-bearing bank account that typically has a higher interest rate than a checking account,” says Bola Sokunbi, certified financial education instructor and founder of Clever Girl Finance.

With some money market accounts, you can even earn more interest with a higher balance. Thanks to its interest-earning potential, a money market account can be the way to go if you’re looking for an account to help you reach your savings goals and priorities.

If you’re deciding between a money market account or checking account, you may think that a money market account seems like a typical savings account with your ability to earn, but it also has some features similar to a checking account. With a money market account, for example, you can withdraw cash from an ATM and use a debit card or checks to access money from the account. There are no limits on ATM withdrawals or official checks mailed to you.

You can withdraw cash from ATMs and write checks with a money market account or checking account.

Before you decide to use this account for your regular bills and your morning caffeine habit, know that federal law limits certain types of withdrawals and transfers from money market accounts to a combined total of six per calendar month per account. If you go over these limitations on more than an occasional basis, your financial institution may choose to close the account.

Don’t need regular access to your funds and want your money to grow until you do need it? Then the benefits of a money market account could be for you.

Deciding between a money market account or checking account

Still debating money market account or checking account? Here are some financial scenarios to help you determine which account may best suit your current needs and goals:

Go with a checking account if…

  • You want to keep your funds liquid. If you’re thinking money market account or checking account, know that a checking account is built for very regular access to your funds. “If you plan to use your account for monthly bill payments and day-to-day transactions, you would be better suited with a checking account, as these support daily and frequent use,” Sokunbi says. Think rent, cable, utilities, groceries, gas, maybe that morning caffeine craving. You get the idea.
  • You want to earn rewards for your spending. When you’re comparing money market account vs. checking account, consider that with some checking accounts—like Discover Cashback Debit—you can earn cash back for your debit card purchases. The best part is you are earning cash back as you keep up with your regular expenses—no hoops to jump through or extra account activity needed. Then put that cashback toward fun things like date night, lunch at your favorite spot or a savings fund dedicated to something special.

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Get 1% cashback on Debit from Discover. 1% cashback on up to $3000 in debit card purchases every month. Limitations apply. Excludes Money market accounts.Discover Bank,Member FDIC.Learn More
  • You want to deposit and withdraw without the stress of a balance requirement. If you do your research when comparing money market accounts vs. checking accounts, you’ll find that some checking accounts don’t require a minimum balance (or much of one). However, you may be required to maintain a minimum balance (and potentially a higher one) with a money market account in order to avoid a fee. If you’re accessing your money frequently and need to make large withdrawals, a checking account with no minimum balance requirement is a convenient option.

Go with a money market account if…

  • You want to earn interest. “If your money is just sitting there, it should be earning money,” Emanuel says of the money market account or checking account question. “I spoke with a woman recently who told me she’d had around $50,000 sitting in her checking account for at least the last 10 years, if not longer. If that money had been in a money market account for the same period of time, she would have earned thousands of dollars on it. Instead she earned nothing,” Emanuel says.
  • You want to put short-term savings in a different account. If you have some short-term savings goals in mind (way to go!), you may benefit from keeping your savings separate from your more transactional checking account so you don’t dip into them for a different purpose. That whole out of sight, out of mind thing. “A money market account is the perfect place for money that will be accessed less frequently, such as an emergency fund [a.k.a. rainy day fund], a vacation fund or a place to park money after you’ve received an inheritance or proceeds from selling a home,” Emanuel says.
  • You need an account to fund your overdraft protection. If you’re comparing money market account vs. checking account, consider that a money market account could also cross over to support spending goals. One way is in the form of overdraft protection. If you enroll in overdraft protection for your checking account, for example, you could designate that funds be pulled from your money market account to cover a balance shortfall.

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“A money market account is the perfect place for money that will be accessed less frequently, such as an emergency fund [a.k.a. rainy day fund], a vacation fund or a place to park money after you’ve received an inheritance or proceeds from selling a home.”

– Jill Emanuel, lead financial coach at Fiscal Fitness

Using both accounts to achieve your financial goals

Speaking of crossover. Both spending and saving are vying for your attention, right? Consider leveraging both types of accounts if you have needs from the checking and money market account lists above.

“Personally, I use my checking account for bill payments, my day-to-day spending, writing checks and for any automatic debits I have each month,” Sokunbi says. She’s added a money market account to the mix “because of the higher interest rate—to store my savings for short-term goals, for investing or for money I’ll be needing soon,” she explains. Maybe it’s not about deciding between a money market account or a checking account, but getting the best of both worlds.

Before opening a money market account or checking account, do your research and compare your options to see which bank offers the best package of low or no fees and customer service, in addition to what you need from an interest and access to cash perspective.

The post Money Market Account or Checking Account: Which Is Best For You? appeared first on Discover Bank – Banking Topics Blog.

Source: discover.com

by Olivia Hughes - January 19, 2021

This is How CDs Work—and How You Can Use Them to Grow Your Savings

If you’ve got savings goals on your mind, then you know they come in all sizes and time horizons.

As you consider all of your options for hitting those goals—from savings accounts to stocks and bonds to stuffing your cash under the mattress—certificates of deposit stand out among the pack thanks to their competitive rates and safety.

“The reason that people are really drawn to CDs is that you can get a higher return than you would get in either a traditional checking account or traditional savings account,” says Kimberly Palmer, personal finance expert at NerdWallet.

Steady returns, in fact, are among the top benefits of CDs. Plus, Palmer adds that CDs are usually FDIC-insured, typically up to $250,000 for each depositor (or the maximum allowed by law).

What is a certificate of deposit? It's a savings product that provides a guaranteed rate of return over a fixed term.

With all those benefits in mind, you might still be wondering if a CD is the right fit for your savings strategy. So, what is a certificate of deposit and how does it work?

What is a certificate of deposit?

A certificate of deposit provides a guaranteed rate of return (the interest rate) on your money as long as you agree not to withdraw the funds you deposited (the principal) until after a specified amount of time (the term).

“It’s best for someone who doesn’t need their money immediately,” Palmer says. “In exchange for that longer period of time where your money is inaccessible, you earn a higher return.”

How does a certificate of deposit work?

Before you can start using certificates of deposit to keep your savings growing at a fixed rate, it helps to know how CDs work. It’s time to familiarize yourself with this one-of-a-kind savings product.

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“The reason that people are really drawn to CDs is that you can get a higher return than you would get in either a traditional checking account or traditional savings account.”

– Kimberly Palmer, personal finance expert at NerdWallet

CD minimum deposit

While you can find savings accounts with no minimum deposit requirement, most banks require a minimum deposit to open a certificate of deposit. As you learn how certificates of deposit work, note that minimum deposits can vary depending on the financial institution, but at Discover it’s $2,500.

CD terms

Once you open a CD, your money grows until it matures at the end of its term. Discover CD terms start at three months, and the longest term available is 10 years.

CD rates

In addition to getting a higher rate than you can on many savings accounts, CD rates are fixed, which means there’s no risk of the rate going down during the term. (Keep in mind they can’t go up, either.) Generally, the longer the CD term, the higher the interest rate you can lock in for your money.

CD early withdrawal penalty

Understanding CD early withdrawal penalties is key to answering the “How does a certificate of deposit work?” question.

You can typically find competitive rates for CDs because your financial institution is counting on having that money for the full term. For that reason, if you pull out any money in your CD before the term ends, you could be hit with a penalty.

Understanding CD early withdrawal penalties is key to answering the “How does a certificate of deposit work?” question.

The early withdrawal penalty often depends on the length of the CD’s term, and it’s a good idea to check with your bank to understand its specific withdrawal penalties.

Got the gist of what a certificate of deposit is? Now it’s time to put this account to work toward your unique savings goals.

How can you use CDs in your own savings strategy?

Because CDs are offered across a wide range of terms, you have the opportunity to get creative with how you take advantage of them. Whether your savings goals are big or small, long- or short-term, there’s a CD savings strategy that will work for you.

Using CDs for short-term goals (less than three years)

“CDs are good for short-term or near-term liquidity needs,” says Philip Gibson, an associate professor of finance.

Let’s say you want to have money ready to spend on an engagement ring a year from now. Putting that money into the stock market could be risky, because if there were a market dip, you’d be out of luck—and you wouldn’t be the only one disappointed!

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Instead, Gibson says, you can put that money into a 12-month CD and ensure that it will be there a year from now.

How does a certificate of deposit work out to be a better short-term option than cash, you ask? Money within a CD will have grown thanks to the competitive interest rate. Cash, Gibson points out, typically loses value over time due to inflation.

However, CDs aren’t ideal for storing cash that you might need at a moment’s notice. Remember: If you pull out your money from a CD before the end of its term, you could be on the hook for an early withdrawal penalty. If quick access is a priority, you’d be better off using a checking account or savings account.

Using CDs for medium-term goals (3-5 years)

CDs can be an effective way to save for medium-term goals, but you need to choose your CD term wisely.

A simple way to reach your goals.

Watch your savings grow with a CD.

Lock in Your Rate

DiscoverCertificate
of Deposit

Discover Bank, Member FDIC

“You want to make sure the CD term you choose matches the time horizon of your goal,” Palmer says.

For example, if you’ll need that money for a down payment on a home in three years, it would make sense to put your money into a CD with a three-year term. A three-year CD would likely give you a higher return than a one- or two-year CD, and your money will be accessible when you are ready to buy a house.

Palmer adds that because money in CDs is only accessible after they mature at the end of their terms, you’ll want to make sure you have three to six months of emergency savings available for unexpected short-term needs before opening a CD with a three- to five-year term.

Using CDs for longer-term goals and retirement

The longer your time horizon for your goals, the more time you have to take advantage of the power of compounding in a CD. Plus, given how certificates of deposit work, longer terms usually have higher interest rates.

If you’re looking even further ahead to retirement, you can open an IRA CD. IRA CDs give you the same reliable growth of regular CDs with the tax advantages of IRAs.

How does a certificate of deposit work when you have multiple savings goals? That's where a CD ladder can be helpful.

Using a CD ladder to support multiple goals

While the above examples show how CDs work to save for specific financial goals, there is a way to use CDs to continually grow your savings as you reach multiple savings goals with varying time horizons. At the same time, with this strategy you can:

  • Keep your funds liquid.
  • Take advantage of interest rates if they go up.
  • Lock in the higher CD rates associated with longer terms.

It’s called a CD ladder, and Palmer says this CD strategy is growing in popularity among savvy savers.

With a CD ladder, you don’t try to guess exactly when you’ll need your funds to be available. Instead, you open multiple CDs with varying maturity dates.

“You might have one CD that matures in six months, one that matures in a year and then another in 18 months,” Palmer says. “That means that the terms keep coming due, and you continually have access to your money.”

What is a certificate of deposit ladder? It's a strategy of opening multiple CDs with varying term lengths to stay flexible.

Every time a new CD matures, you have the option of putting that money toward something you have been saving for, such as a house.

If you aren’t ready to use that money when a CD matures, then you simply open a new CD with a longer term than any CDs you currently have. That new CD is added to the “ladder,” and your money grows at longer-term rates as older CDs approach maturity.

Once you get into a groove with a CD ladder, you can enjoy all the benefits of CDs without worrying about finding a single CD that perfectly matches up with your financial goals.

Ready to get started with a CD?

Now that you have a handle on what a certificate of deposit is and how CDs can work for you, it’s time to get your savings plan started.

Learn how a Discover Certificate of Deposit can help you reach your savings goals, with flexible terms from three months to 10 years.

Articles may contain information from third-parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third-party or information.

The post This is How CDs Work—and How You Can Use Them to Grow Your Savings appeared first on Discover Bank – Banking Topics Blog.

Source: discover.com

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