Benefits of Short-Term CDs Over Money Market Accounts?

With the recent rate hikes that we have seen this year on internet savings and money market accounts, I'm wondering if short-term CDs are attracting any money. An important advantage of a certificate of deposit over a savings account is suppose to be a higher rate. This makes sense since the depositor is giving up some liquidity with the CD. However, in today's awful interest rate environment, short-term CDs don't have much of a rate advantage over savings and money market accounts. Below are some examples of the best rates available for money market and savings accounts and short-term CDs.

Money Market & Savings Account Rates as of 8/10/12

• 1.30% APY money market account at UFB Direct
• 1.25% 6-month intro rate money market ($50K max) & checking ($100K max) at EverBank
• 1.05% APY savings account at CIT Bank
• 1.05% APY money market account at Incredible Bank

Short-Term CD Rates as of 8/10/12

• 1.25% APY 24-month Achiever CD at CIT Bank
• 1.20% APY 18-month CD at iGObanking.com
• 1.15% APY 13-month CD at iGObanking.com
• 1.10% APY 12-month Achiever CD at CIT Bank
• 0.93% APY 11-month No Penalty CD at Ally Bank

I consider the 24-month and 18-month CDs as more of a mid-term CD than a short-term CD, but I included them to show that those rates aren't much higher than the 1-year terms.

As you can see, these CDs don't have much of a rate advantage over the money market and savings accounts. The main advantage of the CDs is that you don't have to worry about rate cuts until maturity. However, even if the savings account rate falls, the average rate over a year probably won't be that much lower than the CD rate. Even if the average rate is 20 basis points lower, that's only $20 for a $10,000 balance over one year. You have to ask yourself if that slightly higher interest rate offsets the reduced liquidity of the CD.

The liquidity feature of savings and money market accounts may not be too important if you don't need the money for a while. However, it can be important if you want to take advantage of a good CD deal that arises. The CD deal may end before your short-term CD matures, and if you break the CD early, you'll be hit with an early withdrawal penalty. In addition, it can take several days to close the CD and move the funds into a liquid account. The best deals can often disappear in just a few days.

With the current rates, I see little advantage of choosing short-term CDs over money market or savings accounts.

If You Have Decided on Short-Term CDs

If you have decided on a short-term CD with a term under 1 year, don't forget Ally Bank's 11-month No Penalty CD. This rate is higher than the vast majority of 6-month and 9-month CD rates. Its no-penalty feature gives the CD holder the ability to make this into any term he or she wants from 7 days to 11 months.

If you have decided on a CD with a 1- or 2-year term, don't forget about CIT Bank's Achiever CDs. These allow an add-on deposit and a rate bump. The only downside is a $25K minimum deposit.

Other Alternatives for Higher Rates

The other alternatives if you want higher yields from a bank or credit union account are long-term CDs and high-yield reward checking accounts. Please refer to my recent posts on long-term CDs and reward checking accounts for the pros and cons of these accounts.