||Ask Dr. Don
Money market vs. CD investing
Dear Dr. Don,
I have $10,000 to invest. Which would be better: a two-year certificate
of deposit or a money market account? How do they differ?
The main difference is in the liquidity of the investments. A non-negotiable
CD is meant to be a buy-and-hold investment. If you need your money
prior to when the CD is scheduled to mature, you pay a penalty for
early withdrawal. That penalty is typically the loss of three to
six months worth of interest income. This Bankrate
feature explains early withdrawal penalties in greater detail.
Money market accounts are set up so you can readily
access your funds without penalty. The price for this convenience
is usually a lower yield on your investment, as shown in the table
Money market/CD yield comparison
|Two-year CD rate:1
|Money market account:
|$10,000+ MM account:
|Top yielding MMM fund:2
weekly averages for CD & money market accounts
2Money market mutual fund yield provided by iMoneyNet
Money market accounts can be Federal Deposit Insurance
Corp. insured but money market mutual funds are not insured deposits.
The mutual fund industry does a good job protecting your principal,
but you should understand how the fund invests by reading its prospectus
before committing any money to a money market mutual fund.
So, if you don't expect to need this money in the
next two years, you can earn more by investing a 2-year CD. You
could also use Bankrate's
Best Rates search engine to find a high-yielding 2.5-year CD.
(Bankrate doesn't track two-year CDs on its Best Rates page.)
Generally speaking, don't invest long-term when you
expect to need the money in the short-term. The converse is also
true. Don't invest short-term when you won't need the money for
a while. You're accepting a lower return for liquidity that you
A happy medium when investing in CDs is to construct
a laddered CD portfolio.
-- Posted: Sept. 26, 2002