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Short term CDs don't measure up

By sbup Staff

Certificates of deposit (CDs) tend to offer better interest rates than other types of deposit accounts. In exchange for the higher rates, you agree to leave your money alone for the term of the CD. But the spread between three-month CDs and money market accounts (MMAs) has narrowed, and short-term CDs now may not be worth the trouble.

Currently, the average annualized rate for three-month CDs nationwide is a mere 0.9%, according to data from the Rate Index. Although the average interest rate for MMAs is just 0.64%, the gap has closed in some parts of the country. 

If you live in New York, for instance, you can earn the same amount of interest from an MMA as you can from a three-month CD. Citibank (C) offers 1.01% interest on its MMAs and 1.0% interest on three-month CDs, while Bank of the Finger Lakes (CBC) offers 1.0% on both products. If you live in Arizona, you could actually earn more on your relatively liquid MMA than on your illiquid short-term CD: Bank of America (BAC) offers 1.0% on MMAs, but just 0.75% on a three-month CD. 

When choosing between the two products, it's important to consider any restrictions related to minimum balances. An MMA will usually require a higher balance, but not always. (The Bank of America interest rates require a minimum of $10,000 for both products.) 

Ron Palastro, a certified financial planner and founder of New York-based R.S. Palastro Financial Planning Services, doesn't like the idea of his clients tying up their money in CDs with terms of six months or fewer. "With rates on short-terms CDs as low as they are, it just doesn't make sense to give up liquidity," says Palastro. "A money market account offers the same rates and lets you jump on any new opportunities." 

To find rates in your area, search by entering your ZIP code on the CD section of

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