Money Market & Certificate of Deposit Accounts: Beating Inflation

April 7, 2023

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Inflation has been a force to be reckoned with over the past year and continues to put a damper on household budgets. And, if the price of eggs lately is any indication—which according to almost every media outlet they seem to be—the cost of living is only getting higher. In fact, the most recent Consumer Price Index data from the Bureau of Labor Statistics (BLS) show that costs have increased 6.4% from the previous year.

But that's not the end of the story. While inflation is out of your control and can affect your day-to-day expenses, you can be proactive with your cash so it goes even further. If you're wondering where to invest and save to combat higher prices, here are two options that are relatively low-risk.

Fighting Inflation with Two Top Financial Tools

Savings accounts may not offer the best Annual Percentage Yield (APY) for your cash right now. And, you probably don't want to put all your savings in the stock market, which can be risky.

The good news is two other options exist that can offer higher returns, with a lower risk profile: certificate of deposit (CDs) and money market accounts (MMAs).

While these accounts have notable differences, they both can offer you the benefits of a higher APY. In other words, you can earn more interest back on your deposits, so your extra cash can grow while it's parked in these accounts and help minimize the impact of inflation. Here's how these accounts work.

Certificate of Deposit Accounts(CDs)

A certificate of deposit provides consumers with higher fixed APY options that can earn them interest on deposits. To qualify for these rates, you need to keep your funds in a CD for a predetermined term of your choosing and may need to have a minimum deposit to create an account.

The length of the term is typically correlated with the rate. If you choose a shorter term, you may get a lower APY and a longer term may have a higher APY. Plus, CDs are protected by the Federal Deposit Insurance Corporation (FDIC), which can give you some extra peace of mind.

The catch? Your money is inaccessible for the duration of your term length. Once you reach the end of your term, your account matures. At that point, you can get your initial investment back as well as the interest earned.

If you do touch the funds in a CD before the term limit, you'll face penalties for withdrawing early and miss out on some of the interest. Exactly what that penalty is will depend on your financial institution, so make sure to read the fine print. Making a withdrawal from a CD before it hits maturity can cost you, effectively missing the point of opening a CD.

So before opening a certificate of deposit account to help beat inflation, make sure it's money you don't need to touch for the term.

Money Market Accounts (MMAs)

There is another place to park your cash that can beat inflation and provide more accessibility than a CD—and that is a money market account (MMA). Money market accounts (MMAs) are used as a savings vehicle and can also go by another name, money market deposit accounts. This type of account generally has a variable rate that is based on the account balance, with higher rates given to higher account balances, and vice versa.

When thinking about where to invest or save your cash to beat inflation, a money market account offers you competitive rates and convenience. You can take out money as you need it with a money market account—up to about six times a month.

There may be a minimum opening deposit plus maintenance fees if your account balance dips below a certain level.

If you can easily meet any minimums and keep your cash in an MMA above this threshold, you can earn more interest than most standard savings accounts. Money market deposits are also insured by the FDIC as well, making it a beneficial, low-risk option.

Doubling Down to Grow Your Cash

If you have extra money sitting in your checking or savings accounts, you can put some of that cash in both certificate of deposit as well as money market accounts.

Money market accounts are good for emergencies as the funds are liquid and accessible, while CDs can help you save for a purchase down the line like a car or vacation. Since you can't touch it without consequences, you can have those funds set aside earning more than traditional savings accounts, and have it available later when you're ready.

Doing all you can to save and invest with continued inflation can insulate the money you've worked hard for and build a sturdy foundation for your finances.

If you want to protect your available cash, connect with a City National Bank of Florida expert online today to open a certificate of deposit and money market account; or visit a local branch.

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Please note: CNB does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.

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Sources:

bls.gov