What is a money market account? Should i consider one of these versus buying a CD?

Question

I am considering buying a CD to save for a house. I only need it for two years. Is a money market account something i should be considering or should i stick with my original plan to fund a CD.

Thanks for all input!

Answer 1

Money market accounts invest in short-term government securities. The return is close to CD rates, but you should shop around for financial institutions for the best rates.

Money market rates fluctuate constantly. CDs are fixed. In the current economy, rates are not likely to fluctuate too much. Short term rates may go down a bit more (when you hear about investors hoping for the Fed to cut the federal funds rate, like they did by half a percent recently, to spur the economy, it means that MM and CD rates will also dip somewhat; interest rates going up means investment interest rates will also), but no one has a crystal ball.

I would look for the best MM rates and compare to the best CD rates. If CDs are returning more than a quarter percent higher, go ahead and lock it in for two yaers. If the difference is smaller, do the money market. If rates go up, you'll make more and be glad you didn't lock in. If rates go down, you can always switch to shorter-term CDs and lock in then.

PS. Just saw pundit's answer. It's good advice and that is what I would do at this stage in my life. But I already have my house, and if losing any of that money means you can't afford the house, you need to consider carefully the risk of investing in the market. Like I said earlier, no one has a crystal ball, and while I don't see it on the near horizon, a market like the one from 2000 to 2002 woukld not be the best place for your downpayment money. Once you have your foundation in place, you can always take on more risk.

Answer 2

If you are choosing between a CD or a money market, the money market will pay a comparable interest rate but your money remains accessible. In a CD, you have to put your money in their hands for the duration of the CD. However, some CD's may pay a higher interest that is worth leaving you rmoney alone if you can do so. If you try to take it out, you will get penalized. Therefore, I prefer money markets.

If you plan to invest for about five years or more, go for mutual funds but money markets or CD's are good short term investments.

Answer 3

Far preferable would be for you to open an account with a reputable investment firm (Fidelity, Invesco, etc.) and put that money in mutual funds. MFs will far outperform any CD or MM rate you will get, and getting 18%, for example, on your money for two years instead of 5% adds up.