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Savings vs CDs vs Money Market

Casey Bridges
Casey Bridges   |     |   1 posts since 2017

I got two questions, first and I'll use Ally Bank as a example, their savings account has a APY of 1.00% and there Money Market is 0.85%. If I got this right, The Money Market account has a lower APY because it gives you more access to your money? My second question is that Ally's savings account has a APY of 1% and they offer a CD for 9 months with a 0.64% APY. Wouldn't that mean that I would make more money with their savings account and if so then why would I want to get a CD at this rate?



Answers
Ken Tumin
Ken Tumin   |     |   5,947 posts since 2009
Those are good questions Casey. Thanks for asking these questions in the forum.

First, an important difference between Ally's money market account and its savings account is that the MMA has check-writing privileges. You can write up to six checks per month. The savings account doesn't offer that. That may be one reason Ally chooses to offer higher rates on the savings account.

About why the short-term CD rates are lower than the savings account rate (and the MMA rate), that is an odd condition. My guess is that these internet savings accounts are loss leaders for the banks. Competition has forced them to offer these higher rates. For a consumer, I see little value in choosing these short-term CDs. Yes, their rates are guaranteed to be fixed for the term, but there's enough competition to ensure that you can move your money to a similar rate if the bank makes a big rate cut on their savings account. That's probably why the leading internet savings account rates haven't fallen below 1% in the last 8 years.
topkapi56
topkapi56   |     |   49 posts since 2011
Well, obviously I would not go for the 9 month CD for sure. The main difference with a CD is that the rate for it is guaranteed for the term of the CD. The savings rate could be dropped tomorrow to 0% if Ally chose to do so.
barry_NY
barry_NY   |     |   22 posts since 2015
Rules governing different types of accounts are regulated by the Federal Reserve. Sometimes they are subtle and make little difference to the consumer, but are expensive to the bank. The Feds want savings accounts used for long term savings only, with little access or movement of money. This means lower costs for the banks.

My guess is that banks don't like short term CDs. The short terms reguire more "paperwork", creating back-end expense. This is like small mortgages. Banks charge higher interest if you don't borrow enough money. This seems counter-intuitive because they are lower risk, which should mean lower interest rates. But mortgages have a lot of expensive "paperwork" which needs to be recovered with a higher interest rate, since there will be little profit from a small mortgage. With a short-term CD, the recovered fee likely translates as a lower rate.
klink
klink   |     |   180 posts since 2012
Casey, check the small print in disclosures. Do either Savings and or money market really give you more access? Most limit withdrawals to 6 per month or statement cycle. Also Topkapi is right, stay here long enough and you will see rates change overnight.
Bozo
Bozo   |     |   945 posts since 2011
Casey, I gave up trying to figure out the "ins and outs" of savings, checking, MMA, number of withdrawals/month, and all he associated gimmicks and fees long ago. You might wish to check out Alliant CU (easy membership). The key is transparency. Alliant is pretty good in that regard.

After doing the math, you will determine (as did I) that the Alliant savings account is basically an interest-bearing checking account, yielding 1.05%, with no charge for the first order of checks, or any per-check charge, or monthly maintenance fee. You then link those six transactions/month at Alliant to a brick-and-mortar bank or CU where you have unlimited check writing at no per-check cost. We do this routinely. I suspect we haven't paid a "per-check" fee in decades.