CD or Money Market Fund? Interesting dilemma. Well. it really depends a lot on what you are planning to do with this money and when you are planning to do it. It depends a lot also on how old you are and if you want to tie your money up for several years or have it readily available when you need it. As with everything else in life today, there are advantages and disadvantages to both options.

First, lets look at a Certificate of Deposit. Definitely the biggest advantage of a CD is that they are insured by an agency of the Federal Government, either the FDIC or the FSLIC. You will never lose any money on a CD and it is insured for up to $100,000 per individual account. CDs usually pay a little higher interest rate but if you need the money for some reason before the maturity date, there are big interest penalties for cashing a CD early. CDs can generally be gotten for terms of from six months up to seven years and the longer you tie up your money, the higher the interest rate. When our first granddaughter was born we got her a $2500 CD and locked in 5.4% for seven years. With the way Bush has screwed things up, that has turned out to be a pretty good deal because the best rates now are around 4% and dropping. If you are not going to need the money right away, a CD is probably the way to go.

Now, lets look at the Money Market Funds and its good and bad points. A MMF is not insurable and you can lose money on a MMF although I think that very rarely happens. MMFs generally invest in reasonably secure short term financials and the interest rates, though not quite as high as CDs are always a lot better than the common savings account. The really nice thing about the MMF is that it is so accessible when your need it. There are not interest penalties when you take money from a MMF. Yes it takes away from the balance that they pay interest on but there is not an actual penalty like there is on aa CD if you cash it early. Most Money Market Funds offer checks and some offer credit cards. Most all of the major brokerage firms like Vanguard and Fidelity offer Money Market Funds that have good interest rates and offer checks. We have ours with Vanguard and right now it is paying almost 4% and you have to write a check for a minimum of $250 but it pays so much better than the 1/4% to 1.2% that the checking accounts at the banks pay so I like to keep the majority of my cash in a Money Market Fund

What the best thing is, is to have some CDs and a Money Market Fund. Have your available cash working for you in a MMF and then if you need some more , when a CD comes up for renewal, take it out of the CD and put it in your Money Market Fund. Always check the rates and shop around . Get the best rates you can to make your money work the hardest for you. You worked hard to get it and now that you have it, make it work for you.

Learn more about this author, Bill Whitney.
Click here to send this author comments or questions.

---

Add your voice

Know something about Choosing money market funds over CDs?
We want to hear your view. Write now!