CD And Money Market Rates Differences

By: EconomyWatch Content Team   Date: 9 March 2010

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With growing concern for saving money, people are starting to compare CD and money market rates to determine which is best.  For years, opening a money market account was considered one of the best ways of saving money and while this is still a good option, today opening a certificate of deposit appears to be a better investment.  Of course, the more traditional means of saving money with a bank savings account has quickly become the least preferred solution.

Then when you look at the stock market especially in today’s financial market, this type of investment is far too risky.  Bonds are an option for saving but to make any significant money in return, the bond would need to be held onto for 10 or 20 years, perhaps even longer.  This leads us back to looking at CD and money market rates to decide if one is a better investment over another.

For starters, a comparison of CD and money market rates shows that for significant deposits, a money market account could offer high yield.  This type of savings uses the financial market as a means of generating interest for investors.  In this case, the deposited money would not be used for mortgages, automobiles, or credit cards but instead, the bank would reinvest your money into short-term holdings that are considered safe and secure.

Most investments made by banks with your money go into bonds, treasury bills, and a variety of other sound investment options.  As the bank earns money on the investment they made, revenue is generated with a portion of the earnings passed to you via high interest rate.  As you compare CD and money market accounts with a traditional bank savings account, you would find that both offer higher interest rates.  Of the two, money market generally offers a rate of 2% more.

Some of the other things you should consider when comparing CD and money market rates is that these accounts have minimum deposit amounts, usually $2,500.  However, if you were to open a money market account with the bank where you do business, you may be able to open a savings account of this type for as low as $1,000.  Again, money market accounts have definite benefits but as you will discover, between CD and money market rates, certificates of deposits come out ahead.

Today, most financial planners are telling investors that any money tied up in stocks should be cashed out and put into certificates of deposits.  However, one thing to consider is that for a CD to work for you, the money would need to remain untouched during the determined term.  One huge benefit of a CD over a money market account is that until 12/31/2013, the government provides protection up to $250,000 in the form of FDIC.  After that time, the amount protected would go back down to the original amount of $100,000.

The biggest advantage when looking at CD and money market rates is that typically, interest on certificates of deposit is higher.  Again, to get the most back from the money you invest in a CD, you need to leave the money alone until it matures but the time the money remains locked needs to be at least three years, preferably six.  Of course, for the highest interest on both CD and money market rates, the more money you can invest the better.  Finally, if you choose to invest a lot of money, $50,000 and up, always make sure to choose a reputable bank that offers FDIC insurance so if the bank were to fail, your money is safe.
 


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