Money Market Account Interest Rate - When It Beats a Certificate of Deposit
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Right now, your money market account interest rate is slightly below prevailing interest rates paid by certificates of deposit, by roughly one-quarter of one percent for one year terms.
What does this mean in practical terms?
It really depends on what the money is for.
If you are saving the money for a specific time period, then you're better off keeping it in a savings certificate.
If you are saving the money for a nonspecific reason, then you're better off keeping it in a money market account.
The Money Market Account Interest Rate Lags a Certificate of Deposit When You Know When You'll Need the Money
This should be more clear when I use some specifics. Let's say you're saving money to pay for your child's college education. You know your child's birthday and current grade level, so you know when they should graduate from high school and therefore in what year they'll start attending college, and you'll need to write a hefty tuition check.
Therefore, you may as well place the money into certificates of deposits and roll them over or renew them when the period is over. And it's smart to take out a CD with the longest possible term that will expire before you need the money.
Therefore, if little Junior is now five years old, you can take out five or ten year certificates of deposit. If they're about to finish their junior year in college, a one year CD is needed.
Maybe you and your wife decide to go on an around the world cruise. Because of your work demands or to get special rates, you have to schedule it for specific dates next summer. You can keep your spending money in a certificate of deposit that will expire before you set sail.
So when you're sure of the exact date you'll need the funds, you may as well put them into a savings certificate so they earn the highest possible interest rate.
But Not All Needs Can Be Scheduled, and Money Market Interest is More Liquid
However, life is not always predictable. Many financial advisers tell people to set up an emergency fund of enough cash to last at least three to six months of expenses, in case they're laid off.
Hopefully, you'll never need to tap into that money. Obviously, however, you can't be sure of that. You could be laid off next week or next year. You may have to take an unplanned trip to a family funeral. Or you may have to pay unexpected medical bills. Or replace your furnace in the middle of winter.
If you face any of those problems you don't want to have to wait for a bank on the other side of the country to release your certificate of deposit. You need immediate access to the cash.
That's where a money market fund is great. Just write the check on your money fund account and deposit it into your personal checking account. That's it.
So it's better for such situations as when you're saving for a house downpayment but don't know exactly when you'll have enough (depends the market and the houses you look at), when Junior is in college and asking for expense money on an irregular basis.
A money market fund account is also better when you're saving money little by little. You can't take out a new certificate of deposit every time you save $50 out of your weekly paychecks, but you can send it to your money market account.
No matter how low a money market account interest rate can go, it beats a savings certificate when you may need the money fast.
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