About the Best Money Market & CD Interest Rates
All investors want to get the best possible return on their money. At the same time, they must take into consideration factors like risk and how easily they can access their money. Money market accounts and certificates of deposit (CDs) both provide better income than regular savings accounts, but each has distinctive features that will be useful to some investors and not others. To make a good investment choice, an investor needs to know how to find the best money market and CD interest rates and how to take other factors into account.
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Identification
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The funds you put into money market accounts are used to buy short-term corporate and government bonds. Under U.S. Securities and Exchange Commission (SEC) rules, a money market fund is limited to a portfolio of securities with average maturities of 90 days or fewer. You are paid the interest the bonds earn minus the fees the fund charges. A CD is a fixed-rate time deposit account with a bank or credit union. You get a guaranteed interest rate until the CD matures (anywhere from three months to five years). In return, you agree to leave your money in the CD until maturity or incur a penalty by forfeiting a portion of the interest you would have earned.
Rate and Risk
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Usually the greater the risk an investment has, the higher the interest or potential gains. That isn't true when comparing CDs and money market funds. CDs are insured by the U.S. Federal Deposit Insurance Corporation (FDIC) and the bank guarantees the interest rate, so there is almost no risk unless you happen to have a long-term CD and end up stuck with a below-market rate because overall interest rates go up. Money market interest rates are generally lower, despite the fact they have somewhat more risk. Money market interest rates are not guaranteed. In addition, the par value of your shares in the fund can lose value, although this is extremely unusual (often, years have gone by without a single U.S. money market fund falling below par). Nevertheless, CDs usually pay higher interest, especially those with maturities of a year or more. The reason for the higher rates typical of CDs is simple: banks are willing to pay more when you agree to leave in place for longer periods.
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Money Market Accounts
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The best interest rates on money market investments are generally with investment firms like Fidelity, Vanguard or Charles Schwab. Although these accounts provide the same check writing privileges as other money market accounts, they typically have high minimum balances (often $5,000 to $25,000). Most banks offer money market accounts and they compete aggressively for investors. You can find attractive rates with low minimum balances, or even none at all.
CDs
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Several factors influence CD rates. The best interest rates are paid on CDs with long maturities. Also, the larger the CD, the better the rate it pays. It's well worthwhile to shop around. As with money market funds, banks compete for CD investors. You will often find the best rates at smaller banks, which are willing to pay premium rates to lure you away from their larger rivals.
Considerations
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There's no simple answer as to what is the best CD or money market interest rate. When making this investment decision, you'll need to consider how much money you can tie up in a minimum balance or commit to a CD and for how long. Many investors put part of their money in each. For example, one strategy is to include CDs in a portfolio to provide low-risk income as a balance to higher risk growth investments. At the same time, the same investor may have a money market account that pays modest interest and use it as a "parking place" for funds when they aren't invested elsewhere.
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