Certificates of Deposit

• Certificates of deposit are sold by banks and credit unions. When you purchase a CD, you agree to leave the money on deposit for a specified period of time called the maturity. Maturities range from three months up to five years. In return, you get a guaranteed interest rate. Generally, a certificate of deposit pays higher interest than money market accounts. CDs are also insured by the FDIC or the National Credit Union Authority. However, CDs allow you little, if any, access to your money until they mature. You can withdraw the money only by paying a penalty (usually in the form of forfeited interest). If you may need some of your money before maturity, consider a "liquid CD," which allows limited withdrawals before maturity. Liquid CDs pay rates between those of regular CDs and money market accounts.
  
  CD rates vary depending on several factors. The longer the maturity, the higher the interest rate will be. Larger CDs also tend to pay higher rates. It's a very good idea to check several banks and credit unions, especially smaller institutions. These frequently offer higher rates to attract new customers. Read the terms for the certificate of deposit carefully because there are some things to watch out for. For example, some CDs have a call feature. This means the bank can redeem the CD early if interest rates drop, leaving you with little choice except to find another (and probably lower yield) place for your money.
  
  

Money Market Accounts

• Money market accounts are offered by investment firms such as Vanguard Funds and Fidelity Investments as well as banks and credit unions. Your savings are used to invest in short-term government and/or corporate bonds (with maturities of 180 days or less). Interest rates are variable because the portfolio of bonds changes constantly as maturing bonds are replaced by new issues. A money market account pays less than CDs but considerably better than regular savings accounts. Money market funds are very safe investment, and those with banks and credit unions are insured. The advantage of a money market account is that you have access to your money as long as you maintain a minimum balance. You can even write a limited number of checks each month.
  
  On average, accounts with investment firms pay more than those with banks. On the other hand, a higher interest rate usually means a higher minimum balance requirement--up to $25,000 for some investment firm accounts. When choosing a money market account, look at the type of bonds the fund invests in. Some funds specialize in government bonds for which some or all of the interest is tax-exempt. A money market fund is a form of mutual fund and charges fees to cover operating expenses. Fees are detailed in the fund prospectus, which you should read carefully before investing. Fees are summarized by the "expense ratio," which is the proportion of the fund's assets that go to pay expenses each year. It's worthwhile to contact the fund when considering a money market fund because they often waive the expense ratio for an introductory period if you agree to open an account.