As of this article, the average money market account rate is 0.8%, and a six-month CD yields 3.5%. Investors; however, can often find much better rates by turning to small banks and credit unions or by opening online accounts.

Example: HSBCdirect.com's high-yield savings account yields 5%, and GMAC Bank and EmigrantDirect each offer 4.9% on their online money market and savings accounts.


Get personal finances under control and pay bills timely. Use our free personal budget software to track expenses so you can stop wasteful spending, and use our free bill reminder calendar so you send in your payments on time.

Free desktop software to balance checkbook entries, or use the software as a computer checkbook register.


Cautious of a volatile stock market, many investors are now switching to the relative safety of money market accounts, money market mutual funds and CDs.

An online survey of 2,500+ U.S. investors conducted by ADVFN, a financial-data website, shows that of those who have moved out of stocks, 49% are keeping that money in some type of cash account, including CDs and money markets. Other investors are turning to futures, options, bonds and commodities.

Financial planners generally recommend that investors keep three to six months of money in vehicles such as money market accounts in case of an emergency. But they caution investors not to be hasty about moving money out of the stock market just to get higher short-term returns.

To figure out if you have the appropriate asset allocation for your age, some financial planners rely on this rule of thumb: Subtract your age from 100 to get the percentage of your portfolio that should go into stocks or stock mutual funds. 

According to that formula, a 60-year-old would have 40% of his holdings in stocks and the rest in fixed income or cash.


Money markets

In general, whatever cash you don't need for monthly bill-paying or expenses should be swept into higher-yielding accounts such as money market accounts or money market funds.

They're similar, although there's an important distinction: A money market account is insured for up to $100,000 by the Federal Deposit Insurance Corp. or the National Credit Union Administration; a money market fund is not.

The risk of losing your money in money market funds; which invest in short-term, high-quality securities such as Treasury bills, is low, though. And their returns are often higher than those of money market accounts.

Over the past seven days, through Wednesday, the average taxable money market fund was yielding 4.7%, according to iMoneyNet. That is significantly better than the average money market account's 0.8% return. 

If you go with a money market fund, shop for ones with low expenses; such as those offered by Vanguard, Schwab and Fidelity, to maximize your return. With money market accounts, look for yields but also compare account features such as minimum-balance requirements.

Internet accounts are "pretty simple," often offering high rates and no minimum-balance requirements, says Catherine Graeber, a principal analyst at Forrester Research. Brick-and-mortar banks, on the other hand, tend to have tiered rates and require a minimum, she notes.


Certificates of deposit 

CDs are also gaining appeal as some investors look for shelter from the volatile market. They come in many flavors, but most commonly, you get a fixed interest rate in return for locking up your money for a certain period of time. 

They're a good bet if you don't need your money for a year for a down payment on a house. But it's not a good idea to tie up all of your emergency funds in CDs. Early-withdrawal penalties can eat into your interest, and principal. "A CD is non-liquid in many regards, so getting a higher rate (than money market accounts) may not offset the liquidity needs," says Robert Greene, a financial planner in Sherman Oaks, Calif.

Generally, the longer the CD term, the higher the interest rate and the stiffer the early-withdrawal penalty. "Right now, there's not a big difference between (the rates of) a six-month CD and a five-year CD," so it may not be worth it to tie up your money for a long time, says McBride.

The average five-year CD is yielding less than a percentage point more than the six-month CD's 3.5% rate, according to Bankrate.com.

One way to benefit from rising interest rates is to ladder CDs, a strategy similar to dollar-cost averaging with stocks. Let's say you have $15,000 and you want to invest in one-, two- and three-year CDs with different rates. You would put $5,000 in each type of CD. When the first matures after a year, you would hope to reinvest those funds in a three-year, higher-interest-rate CD. Laddering is "kind of an idiot-proof way of playing interest rates," says Greene.

Federal law requires financial institutions to hit you with a minimum penalty equal to seven days of interest for withdrawing your principal early from a CD in certain situations; many institutions assess much more severe penalties. At the extreme, if you cash out before the CD matures, you could lose the interest earned and part of your principal.