Money Market Accounts Vs Cds

Interest rates should be a guide for you when choosing to park a surplus of cash. Now in this economy or for the common type household a surplus of cash might not be a reality. However, certain circumstances might come up where you find that you have a bit surplus cash that you want to do something with it. You want to earn interest on it while you are waiting to put it into some other kind of use without tying it up into something too long term.

When I say common type household I define that as a household that has working members but they make just enough income to pay the mortgage / rent, regular household bills and perhaps putting money into an IRA account or a small bit into savings.

This defines a large part of the people in the United States today. A quick example of a circumstance that could come up and leave you with a bit of surplus cash can arise when selling your home.

In the housing boom in the late 1990s and early 2000s selling your home for a profit was very realistic. So lets say after selling your home and buying another one you end up with $50,000 to $100,000 surplus cash on hand.

Now the home you bought needs some remodeling, perhaps more furniture or some near future expense but for now you just don't want the money sitting around a regular savings account earning you very little.

This is where a money market account comes in handy. It acts very much like a regular savings account except that it pays a higher interest rate, compounded daily and paid out monthly. The nice part about it is that you have access to the money at any time, although they do limit the amount of checks or withdrawals from the account to 3 or 6 a month, some with a fee to withdraw and others with no fee.

To give another example of this short term gain, a few years back when before the housing market collapsed, I refinanced our home for a couple of reasons. First off to get a better rate of interest. A lower monthly mortgage payment and to take out some cash to remodel the home for a future sale for a substantial profit. Since I was working a full time job and doing the remodel myself, I figured this would take me about a year to do. I needed the extra cash to proceed with the remodel but I knew I wasn't going to use it all up at once so I put the money into a money market account that at the time was paying 4.25% interest compounded daily and paid out each month on my statement.

I was earning aprox $100.00 a month interest while I slowly did the remodel, only taking out small amounts of cash when I needed it. After the remodel I still had money left over so I then in turn put it into a one year CD that was paying 6.25 % interest.

Now the difference in all this is while I needed cash to complete the remodel I was earning good interest without tying up the use of the money, and then when I was done with using the cash I needed, I tied it up into a good paying CD which I have been rolling over ever since.

Right now interest rates are really bad; money market accounts are averaging about 1 to 1.5 % while CDs are around 2.5 to 3% if you can find them. My point being, don't just let your money sit around doing nothing, always find a way to have your money working for you even if it is only short term.

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