Keep the Emergency Fund Where?

Tiffany asks if it's better to have your money in a certificate of deposit (CD) or a money market account. Dave explains what they are, but talks about why the interest rate is nothing to get excited about.

QUESTION: Tiffany on Twitter asks if it’s better to have your money in a certificate of deposit (CD) or a money market account. Dave explains what they are, but talks about why the interest rate is nothing to get excited about.

ANSWER: A short-term certificate of deposit pays about the same as a money market account, and the money market does not have any penalties for early withdrawal. However, neither one pays anything. Both of them pay about one percent. If they keep half of your interest as a penalty, they are keeping half of “not much.” It doesn’t really matter.

In this interest-rate environment, they are both just aggravating. You are not going to make any money on your money in a savings account in today’s world. I only use these things as short-term places to park money, such as if I’m waiting a month to close on a real estate deal or something like that. I’m not planning to make any money on my money here.

Most of the time, money that’s just sitting there is aggravating me as it sits there. The only exception is my emergency fund, and I decided a long time ago that my emergency fund is not there to make money; it just sits there. I’m cognizant of what it makes, but I don’t care. I’m not worried about it.

But when I’ve got other money just sitting, it’s just royally aggravating. But it is the interest rate environment that we’re in. You don’t have a 4% mortgage world without having a 1% CD world. They somewhat go together.