How to find the right CD or money market account

This is a guest post from Richard Barrington, a Chartered Financial Analyst and 20-year veteran of the financial industry. Barrington blogs regularly at MoneyRates.com.

Conservative savings vehicles such as certificates of deposit (CDs) and money market accounts look especially appealing these days, despite low interest rates. But how do you pick the right savings vehicle for your needs? There are many options, and a little information will help you make the best choice for your situation.

[Article continued below…]

First, let's define some basic terms.

Money market accounts pay an interest rate which can vary from day-to-day. Most money market accounts allow you to access your money via checks or an ATM card, but be sure to check on how many transactions you are allowed to make, as most money market accounts have a transaction limit. Relatively speaking, however, they provide a fair amount of liquidity.

In contrast, a certificate of deposit requires that you commit your money for a fixed period of time, with a penalty for early withdrawal. While this reduces access to your money, the benefit is that the interest rate is fixed for the term of the CD, and that interest rate will generally be higher than the interest on more liquid accounts.
[J.D.'s note: To learn more, check out my introduction to certificates of deposit from last autumn.]

Safety first

The number one goal of a conservative savings vehicle is to make sure you don't lose any money. Therefore, if you are trying to stay conservative, you want to make sure you are putting your money into a guaranteed account.

You may be aware that the Federal Deposit Insurance Corporation (FDIC) insures certain bank deposits. However, that does not mean they insure all bank financial products. For example, CDs, money market accounts, savings and checking accounts are all covered by the FDIC. Investment vehicles, such as mutual funds and annuities, are not covered, even if they are purchased through a bank. And some types of CDs that don't pay a predetermined rate of interest (but act more like investments and pay according to market performance) aren't covered either.

Also be aware of FDIC insurance limits. In general, these are $100,000 per depositor with each bank, but for 2009 that limit has been temporarily raised to $250,000. There are other variables as well, so when opening an account, have your banker confirm in writing whether it is covered by FDIC insurance.

Liquidity vs. return

Once you've seen to the safety of your money by identifying guaranteed savings options, you can shop for the best rate. Interest rates go up and down all the time, but one of the biggest factors in determining the level of interest rates is the length of time for which you are willing to lock up your money. In general, the longer your money is committed, the higher the interest rate you will get.

This is why checking accounts, in which your money is subject to continual access, often pay no interest rate at all. High-yield savings accounts and money market accounts can do a little better for you, and CDs may do better still, especially if you are willing to lock your money up for a longer term.

By sacrificing liquidity — easy access to your money — you can generally obtain a higher return.

Shopping for rates: What to look for

As you shop for certificates of deposit and money market accounts, it may help to work in this order:

  1. Confirm that any vehicle you are considering is covered by FDIC insurance.
  2. Identify which vehicles fit the time frame in which you will need the money, remembering that longer commitments can yield higher interest rates.
  3. Shop for rates among vehicles which meet your time frame.

Using an online resource is an ideal way to shop for rates, because this brings together information from a wide variety of sources. This way, in just a few minutes you can make decisions which directly earn you extra money.

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BloggingBanks
BloggingBanks
11 years ago

Great article and thanks for sharing it with us. For the best CD rates I would recommend GMAC bank. Another option would be to check with your local credit union or local bank for their best rates available.
Another thing to consider is opening a checking or savings account and generating $25 to $200 in bonuses for this.

Sharon
Sharon
11 years ago

Right now, I have 13 month CDs with my bank. They pay only 2.25% but they are no penalty if I take the money out. The best rates at the time were 2.5% I have the interest transfered to one of my checking accts. The checking accounts pay 5% interest on amounts up to $25,000. Of course, there are stipulations, using your debit and having one electronic transfer. But right now it’s worth the effort. You can open as many checking accts as you like to get that rate, but you do have to meet those requirements for each acct.… Read more »

Will Crowthers
Will Crowthers
11 years ago

Excellent post!

I love the focus on return v. liquidity as that is the typical decision that has to be made. Otherwise, not having money in a CD or Money Market is like passing up FREE money. We had a guest post regarding this issue as well:
http://www.twentysomethingsense.com/2009/03/free-money-seriously.html

Depending on the amount you are going to be stashing away in cash, you could always do both a CD and a Money Market. You would then average out the return, but maintain liquidity.

Aniruddha
Aniruddha
11 years ago

Very nice article. GMAC should also be considered for any short term CDs (3 months @ 1.73%). I am holding back from opening high-yielding checking accounts but if one can manage to meet the requirements, Sharon’s efforts are worth it.

Aman@BullsBattleBears
11 years ago

Great article. I agree with others that GMAC seems to have the better rates when compared to my local banks (big and small sized banks alike)

Aniruddha
Aniruddha
11 years ago

Not to forget your credit unions are also worth checking out. You will get rates much better than most of the banks out there today and you will be treated like a partner. For eg. my credit union pays almost 1% more for 6-month CD than the average rate.

DebtGoal
DebtGoal
11 years ago

Also look into high-yield online savings accounts.

David Safar
David Safar
11 years ago

I’m a little surprised not to see any specific online resources for rate research mentioned. Personally, I’m a rate-surfer, and I make extensive use of BankRate every time I’m looking to start a CD, or decide what to do with one that is just maturing. And yes, FDIC insurance is a must. I’ve already been through an FDIC bailout when NetBank went under. My CD with them got rolled over into an ING Direct Orange CD, and it went off without a hitch. FDIC FTW!

Lost
Lost
11 years ago

Good article, but he missed on not mentionind Credit Unions which are insured through the NCUA for the same amount of $250,000 and there are ways to get that coverage doubled by having accounts in different names say one for you, one for your wife and one with both of your names.

Liz
Liz
11 years ago

Interesting post. I have been trying to simplify my finances over the last six months. Therefore, I choose to keep my money market account with the same company that holds my other investments. No rate surfing for me – especially with the small difference in rates.

sandy
sandy
11 years ago

I’m also not a rate surfer…we have multiple retirement funds, and it’s hard to keep track of all the papework. So, with our checking and savings, we stay with our local bank. The other day, one of our CDs came due, and I went to the bank to see what the rates were. She was really helpful, but unfortunately, rates have taken a serious dive and she couldn’t offer much in the way of CDs. But, if we wanted to close the CD and move it into savings, we could get 3x the the CD rate. It will continue to… Read more »

David
David
11 years ago

You can earn a 10 percent guaranteed risk free return rate on your money if you pay off your credit card debt or you can earn 6 percent on your money if you pay off your mortgage.

Getting a 6 percent risk free return is a much better deal than a measly 3 percent CD from your bank.

Aman@BullsBattleBears
11 years ago

@David, that only applies IF you have CC debt or a mortgage. Some of us fortunately carry neither.

Aman@BullsBattleBears
11 years ago

@David, that only applies IF you have CC debt or a mortgage. Some of us fortunately carry neither.
OH! You’re my new favorite blogger fyi

Andy
Andy
11 years ago

I’m looking into CDs for my family — including for my 3-year-old daughter. I figure it’s a safe way to build some cash in addition to investing. I know the interest isn’t great, but I think it’s a great addition to our plan.

Richard Barrington
Richard Barrington
11 years ago

It’s great that some people have a favorite bank, but with conditions changing daily, also consider checking out a resource like http://www.MoneyRates.com. MoneyRates regularly updates rate information from some 200 banks, so they can take the effort out of shopping around and earning some extra money.

Richard Barrington
Richard Barrington
11 years ago

Regarding David’s comment on paying down debt:
Absolutely, I’m a big believer in minimizing debt — I’ve both advocated it and lived it! However, especially in the case of long-term, asset-backed debt like a mortgage, it can also be wise to carry some debt while building up savings for liquidity purposese. Remember, most bankruptcies result from cash flow problems rather than actually having a negative net worth. Especially with the job market being rather uncertain, I do think that mortgage debt and CD investments can coexist sensibly.

Mike
Mike
11 years ago

I don’t see Vanguard on there. Don’t they have good MMA rates as well (e.g., Prime Money Market Fund)? Anyone know about this?

DFC
DFC
11 years ago

@18
your comparing money market funds to money market accounts

Jason
Jason
11 years ago

checkingfinder.com is a great place to look as well. They compile lists of local banks/credit unions nationwide that pay in excess of 5% and offer atm fee reimbursements. However, there is a catch. It appears that you have to have at least one direct deposit per month, use the debit card at least 10 times, and log into online banking at least once during the month. If you don’t do those things, your interest rate drops down around 1%, but only for that month in which you do not do those things. The next month you earn whatever your normal… Read more »

Dan
Dan
11 years ago

Your headline (shows up on home page) about FDIC limit of $250,000 expiring at the end of the year is no longer accurate, as it’s been extended through 2013.

See, e.g., http://www.fdic.gov/deposit/deposits/insuringdeposits/

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