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Short-term Investing

Dear Dr. Don,
I set aside $10,000 that I am not planning on using for at least a year. Is it better to put it in a money market account or a CD?
Louie Loan

Dear Louie,
If you are absolutely, positively sure you won't need the money over the next year, then a CD should offer a yield pickup over a money market account. It's time to go shopping. Use Bankrate's Rate Search feature whether you're just shopping in your market or want to see what's available nationwide.

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Here's what I found in Bankrate's home market:

Short-term vehicle West Palm Beach, Fla. Nationwide
Money Market Account (APY) 2.15% 2.15%
1-year CD (APY) 2.25% 2.27%
1-year Treasury Security 1.41% 1.41%

Virtual Bank, which happens to be headquartered in Palm Beach Gardens, Fla., offers the highest yield nationally on a money market account. While the U.S. Treasury no longer offers securities maturing in a year, outstanding longer term issues with a year remaining until maturity are currently priced to yield 1.41 percent.

Limiting yourself to local financial institutions can reduce your return. Nationwide, the interest rate on a one-year CD did beat out the money market account, but only by about one-tenth of a percentage point. Remember that the interest rate on a money market account is variable, so you can't count on earning that return over the full year.

-- Updated: April 28, 2004

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See Also
Emergency fund yields
Money market investing
Financial advice glossary
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