Money Market account vs. CD

[librarylady]

I have a question I have been wanting to ask for a long time. Finally getting around to it.
What is the difference between a money market account and a CD. I mean, I know the difference, but what are the advantages of having one over the other?
I have money in an online money market account or savings account and I am wondering if it would be better to move some of that $$ to a CD.
Thanks in advance for your help.

[novice_investor]

One basic difference would be liquidity of the funds. You are locked in for a fix period in a CD with no access. Depending on how critical is the liquidity of the funds, CD's typically will pay better. Based on what I have gathered from financial professionals, they don't anticipate any upward movement on interest atleast for the next 9 - 12 months

[librarylady]

So, yeah, thanks for your reply. So, CDs would give me more return on my money? I understand that I would have to pay a penalty for early withdrawal.
Are there any other advantages in CDs over Money Market account?

[Aleta]

The big advantage is that the rate you receive will be until the maturity of the CD and won't change. Your rate is locked in. The money market or savings account rates can change whenever they want to. A lot depends on when you need the money. Some people like the advantage of checks and transfers of their money market. Savings can only be transferred to an account.

[disneysteve]

The other big difference is that the interest rate on the CD is fixed for the term of the CD. The rate on the MMA is variable. It can and will change periodically based on prevailing government rates.

Typically, MMA rates are lower than a CD of 1-year or longer duration so if you have money that you don't need immediate access to and don't mind tying it up for a year, you can earn a bit more with a CD.

[jIM_Ohio]

In a rising rate environment you will like money market (interest will rise quickly, giving you a higher return from your money)

In a falling rate environment CDs will lock in the higher return for you.

The money you invest (in a CD or money market) will be invested in different things, so the returns will be different anyways.

CDs are deposits to a bank. The bank is probably going to loan your money out, and make money on the spread (if bank gives you 2% rate, they might be loaning it out for 8%, so the bank makes 5% on the difference).

Money markets will be invested in short term securities- various types of treasuries, real estate securities and similar which have short term maturities.

Both types of investments are pegged to interest rates, but they are not really "invested" in the same things.

[disneysteve]

(if bank gives you 2% rate, they might be loaning it out for 8%, so the bank makes 5% on the difference)

Long weekend, Jim? I think you meant to say the bank makes 6%.

[librarylady]

Okay, so how do you know if you are in a falling or rising rate environment. What are we in now?
Thanks for your replies. I understand it better now.

[Broken Arrow]

Basically, if the economy is doing poorly, the Federal Reserve will lower interest rates to stimulate lending and borrowing. Right now, the interest rate is basically at 0%, so uh I'm going to go with rising interest rate environment. The question now is when will the interest rates rise?

[jIM_Ohio]

Okay, so how do you know if you are in a falling or rising rate environment. What are we in now?
Thanks for your replies. I understand it better now.

Interest rates are at an all time low, so within next 5 years rates will **probably** rise and more than likely in next 2 years rates will slowly go upwards- rates are controlled by the federal reserve board, so if you google FRB or Federal reserve board, and see what new publications track them (like CNN Money or Reuters) you can get an idea as to when rates start to go up.


In general, rates are low during a recession
then as growth occurs (recession ends) inflation starts creeping in, when inflation creeps in, rates go up.

[av2000]

The big advantage is that the rate you receive will be until the maturity of the CD and won't change. Your rate is locked in. The money market or savings account rates can change whenever they want to. A lot depends on when you need the money. Some people like the advantage of checks and transfers of their money market. Savings can only be transferred to an account.

Agree. CD rate is locked in till its maturity, so you will having a fixed interest within its duration.

[littleroc02us]

The question I would ask yourself is "what is your intention with the money?" If you want to save the money and get a good interest rate for a short term than CD's can be good, but if you want to use the money as an emergency fund or for payments, than you would keep the money in a money market fund where you can write checks.

[feh]

At this point in time, CDs don't make any sense. Interest rates are only going to go up. Additionally, while savings accounts can be found earning 2%, you won't find a CD at that rate.

[librarylady]

Thanks to everyone for your replies. I think I will just leave my money in the online saving account for now, and watch for rising interest rates through the websites you suggested.