There are a number of avenues available for those interested in investing their money. This article deals specifically with options available through banks, including checking and savings accounts, certificates of deposit and money market accounts.
Checking and Savings Accounts
Checking accounts are very liquid (it is easy to get your money out, on demand) and not at all volatile (the money you put into the account is secure.) Other than erosion of value due to inflation, checking accounts pose no risk if you are banking with an entity insured by the Federal Deposit Insurance Corporation (FDIC) and have an account balance less than $100,000. (The FDIC covers individual accounts up to $100,000 and joint accounts up to $100,000 per individual. FDIC insured accounts are backed by the full faith of the United States Government.) Typically, the interest paid on checking account balances is very low.
Savings accounts are also very liquid and not volatile, and have the same FDIC guarantees as checking accounts. The interest earned in savings accounts is typically higher than that earned in checking account balances.
Certificates of Deposit (CDs)
Certificates of Deposit are offered by financial institutions such banks. People put money in them because they offer a higher yield than checking and savings accounts, with no volatility, although they are less liquid.
A Certificate of Deposit is a financial asset that you can buy that guarantees your principal (you can't lose any money) and a yield (rate of return) over a period of time (to a maturity date). If you buy a CD from a bank insured by the FDIC, it is as safe as a U.S. Government security. Provided that your investment falls beneath the FDIC set limit, you are guaranteed a return of your deposit, assuming you hold the CD to maturity. CDs are less liquid than savings accounts because if you want to get your money, except for a brief period right after the maturity date, there will be a penalty for early withdrawal. You may forfeit as much as all of the interest, as well as a percentage of the asset's value.
Money Market Funds
A money market fund is technically a mutual fund that invests in short term debt instruments, such as overnight or very short term borrowings by corporations. The objective in a money market fund is to maintain the net asset value at $1 per share while earning higher yields than are available in checking and savings accounts and CDs. Some money market funds offer tax-free interest. Money market funds are usually just as liquid as a checking account - often offering 'check writing' privileges - with a higher yield but slightly more volatility.
Copyright - 2000 Prime Dynamics, LLC; Author: E. Craig MacBean