Q&A: CDs or Money Market Accounts?

Q: I have several thousand dollars I’d like to park for a few months. I know bank rates are low right now, but I’ll take the safety of bank deposit accounts over the stock market. I’m thinking of ether a certificate of deposit or a money market account. Any ideas? – B.R. Sharpe, Atlanta

A: You’re right about bank interest rates, which remain at anemic levels well into 2010. But you’re also right about the stock market. After last week’s 1,000-point plunge in a matter of minutes, and the debt-debacle going on in Greece right now, stocks seem more volatile than they have in a long time.

So if it comes down to CDs versus money market accounts, there are some differences.

First, of course, is your rate of return. Currently, three-month CDs are paying out as much as a money market account (which has no fixed time-frame), as measured by the BankingMyWay Weekly CD Rate Tracker and by the BankingMyWay Weekly Money Market Tracker. Three-month CDs are averaging a 0.323% interest rate, while money market accounts are averaging 0.326%.

That said, if you can hold off for a few months and buy a six-month CD, the average rate there is at 0.502%.

Interest rates aren’t the only issue when comparing CDs and money market accounts.

Besides interest, you’ll want to weight access to your cash. Ask yourself some questions here: how often, if at all, will you need to dip into your cash reserves? If and when you do, how do you like to get your money out? By cash; by check, or via an online mechanism like Paypal.com?

Then there are withdrawal penalties. Most short-term savings accounts don’t have withdrawal penalties (unless you consider a $3 ATM fee a penalty, as some do). Yet with a CD, you can’t get your mitts on your money until the CD matures, without paying an early withdrawal penalty. While bank CD early-withdrawal fees vary, you can count on paying roughly 70 days interest on a three-month CD — and that could negate the interest you’ve earned.

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