Q&A: CDs or Money Market Accounts?

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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.

Money market accounts, on the other hand, are liquid — that means you have penalty-free access to your cash via checks, transfers and ATMs. One catch is, unlike CDs, you’ll likely have to make a minimum number of transactions from your account, usually from a debit card or check, to qualify for the money market rate.

That’s one case where, if you don’t meet the minimum transaction requirements, you can actually pay a penalty on a money market account.

The Takeaway: Since you only need to park your money for “a few months,” and since three-month CD rates are so similar right now to money market rates, your best bet may be to opt for a good money market account that would give you instant and penalty-free access to your cash if an emergency arises.

Some good news, too. You can find the best money market rates at BankingMyWay’s Money Market Rate Search. Just plug in your zip code and you’re ready to roll.

Best of luck on your search.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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