Choosing between a CD rate and a Money Market rate?

CD rates may cost you flexibility, and some upside when rates finally start moving up.

If you have no concerns about locking up your money, you might as well invest in a CD. Right now CD rates for terms of 2 years or more offer a clear advantage over money market account rates. However, money market accounts offer the advantage of being able to move your funds with prevailing bank rates. If the macroeconomic trends are pointing to a rise in interest rates, you may be better off looking for yield in a money market account — and preserving the flexibility of your deposits — rather than committing to current CD rates.

Choosing between the two can be daunting. You can look at the rate tables here on RateNerd.com, or look at this example with Discover Bank CDs rates and Discover Bank Money Market rates:

Term	CD APY	Money Market APY ($10K-100K)
3 Months	0.75%	1.40%
6 Months	1.00%	1.40%
9 Months	1.10%	1.40%
12 Months	1.60%	1.40%
18 Months	1.80%	1.40%
24 Months	2.15%	1.40%
30 Months	2.20%	1.40%
3 Years	2.50%	1.40%
4 Years	2.65%	1.40%
5 Years	3.20%	1.40%
7 Years	3.40%	1.40%
10 Years	3.70%	1.40%

You can see that the Discover Bank CDs 12-month CDs rate and the money market rate are neck and neck, but the CD rate nearly doubles if you are willing to lock up your money for 10 years.

The main difference is in the liquidity of the investments. A non-negotiable CD is meant to be a buy-and-hold investment. If you need your money prior to when the CD is scheduled to mature, you pay a penalty for early withdrawal. That penalty is typically the loss of three to six months worth of interest income.

Generally speaking, don’t invest long-term when you expect to need the money in the short-term. The converse is also true. Don’t invest short-term when you won’t need the money for a while. You’re accepting a lower return for liquidity that you don’t need.

Certificates of Deposit (CDs)

CDs are safe investments with little to no risk and are locked in for a set amount of time. There is usually a minimum deposit of $500 to $10,000 and account holders are typically subject to a penalty for early withdrawal. FDIC-insured CDs earn interest rates around 1.10% to 1.60% for 12 months (based on the national average).

Money Market Accounts

Money market accounts are also short-term debt instruments that earn interest based on funds from commercial paper, repossessions, Treasury Bills and other securities with a maturity date of one year or less. They are FDIC-insured and currently average about 1.07%. As long as you meet the minimum base deposit amount at any given time, you are not normally penalized for a specified number of monthly withdrawals. Don’t confuse this with a money market “fund,” though, which is not FDIC-insured.