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CDs and Money Market Funds: posted on Sunday, 03 January 2010

A safe option for parking your cash.

Wall Street’s crisis last year may have encouraged you to rethink your investment strategy. Although the stock market may be recovering, now may be a good time to review proven methods of saving cash – CDs and Money Market Accounts. Many of our clients, especially entrepreneurs, are turning to these staples of banking, which often prove more secure and are insured by the Federal Deposit Insurance Corporation (FDIC).

As we start 2010, now is an opportune time to review what these types of savings accounts offer, specifically the terms you can get to help protect and grow your hard earned savings.

Certificates of Deposit

Better known as CDs, these time deposit accounts allow you to invest a fixed sum of money for a fixed term – from a few months to several years. In return for your agreement to allow the bank to hold your money for a pre-determined period, the bank guarantees you an interest rate – usually higher than a checking or savings account. A drawback is the penalty for accessing your money early, which might make it hard if you need the cash before the CD matures. It may be a great fit if you don’t need immediate access to your funds and want a guaranteed rate of return. The advantages to using CDs include:

• FDIC-insured. CDs have the benefit of being FDIC-insured, providing added security. Recently, the FDIC raised its ceiling on deposits from $100,000 to $250,000 per depositor. This could change again in 2010, so please consult your financial advisor before investing.

• Yield. When you buy a CD, you may want to consider the rate that you will yield on your money. If you’d like to see how much interest you can earn on a Certificate of Deposit, you may visit UnionBank.com’s CD Interest Earnings Calculator. This tool will help forecast a detailed schedule of your CD’s balance and interest earned, showing you how your money could grow.

• Options. There are Non-IRA CDs and IRA CDs that have different features and restrictions on minimum account openings, rates (with IRA CDs they can be variable), service charges, deposits, etc. Please be sure to ask your banker for details before you open your account.

Money Market Accounts

If you need quicker access to your cash, high yielding money-market deposit or savings accounts may be a better option for you than CDs. Unlike CDs, with these investments you can access your money the day after you open the account. Since these generally have higher minimum deposit amounts than a regular checking account, the rate of interest paid is higher. Money Market accounts offer other benefits including:

• Check-writing privileges. You may also have check writing privileges, but usually there is a limit on the total number of checks and transactions that you can have each month. As with bank accounts, the funds in money market accounts are insured by the FDIC.

• Interest earned. Interest is variable depending on market rates and is compounded and paid monthly. Interest is also tiered, meaning the more money you have in an account the more interest you can earn.

• Immediate access to money. Being able to access your funds may make these accounts more inviting to some wary investors. With money market accounts you can obtain cash when you need it and there are no penalties for taking out funds.

Don’t confuse bank money-market accounts with money-market mutual funds, which are regulated funds that own a collection of short term securities.

Reviewing these great risk-free options for investing your cash can help you make any necessary adjustments now to maximize your nest egg for the future.

The foregoing article is intended to provide general information about CDs and Money Market funds and is not considered financial or tax advice from Union Bank. Please consult your financial or tax advisor.

Amy Taylor is the Priority Banking manager for the San Diego Main Branch of Union Bank, N.A. Union Bank, N.A., is a full-service commercial bank providing an array of financial services to individuals, small businesses, middle-market companies, and major corporations. Visit www.unionbank.com for more information.

Posted by Amy Taylor