Question

Kim has four savings accounts, a regular savings account, a money market account, a one-year CD, and a two-year CD, each with a balance of just over $1,000. Last week her daughter asked her for $185 for a school trip. From which account should she withdraw this $185?

A. Regular savings account
B. Money market account
C. One-year CD
D. Two-year CD

Answer 1

Kim should withdraw the $185 from her regular savings account to avoid the substantial penalties associated with early withdrawal from her CDs or potential restrictions and penalties from a money market account.

Step-by-step explanation:

Kim should withdraw the $185 from her regular savings account. Certificates of deposit (CDs), including the one-year and two-year CDs she holds, are time-bound savings instruments that offer higher interest rates in return for the commitment to leave the money untouched for a fixed period. Withdrawing from a CD before its maturity date typically incurs a substantial penalty for early withdrawal. This makes them less suitable for unexpected needs or immediate expenses. In contrast, a regular savings account provides more liquidity, allowing for withdrawals without such penalties. On the other hand, a money market account usually has higher minimum balance requirements or limited transactions per month, so it could also incur penalties depending on the terms.