Season 4, Episode 8: WTF is a CD Ladder? Money Market Account?
In Which We Return to the Concept of Low Risk, Low Reward
Back to the basics, Women on the Verge!
WTF is a stock??? LOL. Jkjk. (But that’s a totally legit question - find the answer here!)
If you thought the annuities episode was boring, come on back for a real snoozer. This time Sara explains WTF CD ladders and money market accounts.
Are you still awake?
What’s wrong with you?!
Poor Sara. If you have a bunch of money you can’t invest because you might need it sooner rather than later, you should probably pay attention here. CD ladders and money market accounts seem to be the kind of “safe” options that drive real investing people (Sara) crazy, but might have their place in a fully diversified money-type situation.
Don’t worry, we cut her off before she tried to explain the “yield curve”. There’s only so much stimulants one can take before a podcast episode recording session. You’re gonna have to find out what that is on your own time.
But, as usual, Caitlin learns 1/10th of what Sara explains, and you might, too! Fun!
Ask us your dumb investing and finance questions, or just say hi! on our Ask Us page!
We have the social medias!! Here’s our Instagram and Facebook and LinkedIn.
This episode was edited by our co-producer Kelly West. Music by Bad Bad Hats and Devmo.
Transcripts for Season 4, Episode 8: WTF is a CD Ladder? Money Market Account?
Caitlin [00:00:03] Welcome to Women on the Verge of a Financial Breakthrough, where we're figuring out finance one dumb question at a time. I'm Caitlin Meredith, a mediator and coach based in the Bay Area.
Sara [00:00:18] I'm Sara Glakas, Investor, advisor, and founder of BlackBarn Financial, and the Austin Women's Investing Group, which you can find on Meetup. Can you text this show to a friend? We want more money, friends. And if you leave us a review, not only does it help other women on the verge discover the show, it makes us feel like a secret admirer delivered a basket of breakfast tacos.
Caitlin [00:00:46] Sara, I'm very excited about this episode because I feel like it's really bringing us back to our roots, our basics, what the fuck questions.
Sara [00:00:55] Oh my gosh, I'm on the edge of my seat. What could you possibly need to know that we have not covered already?
Caitlin [00:01:03] What is a stock? Just one more time. What is the stock? What does the stock market mean? I'm not telling. LOL. But listeners, if that is a true question, we're joking about it now because it's one of my questions that I will always have, even though Sara's explained it to me a million times. We do have an episode, WTF is a Stock, I think. Yeah. So look that up. It's a good one. There's no question too basic for women on the verge. We need to know it all and we need to hear it many, many, times. So today, I'm in some of these Facebook groups and they just like throw out terms so casually. I'm like, yeah, yeah. CD ladder, of course. Like that will be my next course of action. I have no idea what a CD ladder is. I don't know what a money market account is. I'm like, oh, I'd love to go to the money market, like a stock market. I'll go to money market but like then dollar for a dollar. And so this is my safe space to ask, what is a CD ladder and what is the money market account?
Sara [00:02:14] Oh my gosh, those are really good questions because they are more exciting to talk about now than they were last time we recorded an episode about high yield savings accounts.
Caitlin [00:02:24] The dreaded high-yield savings.
Sara [00:02:27] I know which now is more interesting, right? Okay. So if we start with let's start with CD ladders
Caitlin [00:02:33] Because there's a CDs, those like non musical CDs, I think means certificate of deposit. Yes, exactly. Look at me. And so I kind of get that you can tell your bank, I want a CD and here's $5,000 and then you can't touch it for a year. I have a big idea of that notion, but then you bring in a ladder and a ruler and I don't know, duct tape and I'm lost. Why do we need a ladder at the bank?
Sara [00:03:06] Yeah, so CD stands for certificate of deposit. And so typically, like the most basic understanding of it is you go to a bank, you give them $5,000, $10,000 whatever it is, and they say, Okay, we'll give this back this money back to you in three months, plus any interest that you've received over that three month period. Okay, so a CD can have different maturity dates. It can be a three-month CD where it matures in three months. It can be a six-month cd matures and six months. It can't be a 3-year cd where it matures into 36 months.
Caitlin [00:03:49] Matures. Like, what does that mean? It went through puberty? Like, what is that? It's a dictated time. It's like a release date.
Sara [00:03:59] Yes. A CD is really a contract that you have with the bank. So this is very similar to a bond or a loan, something like that, where the terms of the agreement between you and the bank, the terms are you will lend them $5,000. So like I said, you're giving it to them, You're not giving it to them, you're lending it to that.
Caitlin [00:04:28] Right. So maturity just means that that time has passed, not that that CD has achieved some other benchmark. It's just the passage of time.
Sara [00:04:37] It has achieved the end of the time period that the agreement was made. And so the maturity date or the, I don't know, you don't really call it an expiration date. You call it a maturity date.
Caitlin [00:04:48] We don't know why, we just do it that way, okay, I'll shut up about it.
Sara [00:04:54] It's a date that is on the calendar. It's not up for negotiation. It is a deadline.
Caitlin [00:04:59] Okay.
Sara [00:05:00] So you will know the day to the day on which your CD matures.
Caitlin [00:05:07] Meaning I have access, I get my money plus interest back.
Sara [00:05:11] Right, the maturity date is the date that the bank pays you back what you've lent to them in this CD arrangement. If it's a three month, six month, nine month, 12 month CD, typically, not always, but typically on that maturity date, you get all of the interest that you've accumulated and you get your money back, all on the same day.
Caitlin [00:05:37] Am I right in assuming that the longer I let them have my money, borrow my money the better the interest rate would be because they want to have my money for longer?
Sara [00:05:50] Very intuitive and not always the case.
Caitlin [00:05:54] Thank you, I get a gold star for trying.
Sara [00:05:57] Yes. When that is the case, it's called a normal yield curve or in a normal interest rate environment. Short term loans should have a lower interest rate than long term loans, all things being equal, right? Because you're giving your money up for longer. It's not always all things being equal. There are a million scenarios under which including, I mean, up until really recently, so we're recording this in early September, 2025, up until very recently, short-term rates were quite a bit higher than longer term rates.
Caitlin [00:06:39] Because they needed money and so they were trying to induce people any way they could.
Sara [00:06:45] Did we already do an episode on the yield curve? Does that ring a bell? No, it sounds terrible. It is terrible. It's the worst thing in the universe to try to explain. But if one googled inverted yield curve or normal yield curve, you would be inundated with lots of academic research and articles about why those things happen. You can think of an interest rate like the price of money. Like, what does a bank need to give you to entice you to lend it money in the CD arrangement? How much interest do you have to pay a bank to convince the bank to lend you a 30-year mortgage? So there's a price to that transaction. And that price is changing all the time. So most of the time, in normal circumstances, short-term rates are lower than longer-term rates, but not always. For a bunch of very very important and very very boring and hard to explain reasons.
Caitlin [00:07:50] Let's just leave it there, listeners, shall we? Sara knows we don't. That's okay.
Sara [00:07:56] You do not want to know.
Caitlin [00:07:58] Women on the verge don't need to know everything about how the market works. But me, Caitlin, I have whatever, my $5,000. I might be choosing a three-month to a five-year CD. That could be influenced. Whether I choose that could be what interest rate is better, when I actually need the money or want to have access to it again. Yes. And maybe some other thing I can't think of, but that might be in the mix, me shopping around what's the best interest rate I can get.
Sara [00:08:34] Yes, exactly. The other defining feature of a CD, because it's a bank instrument, it is FDIC insured. So you will definitely get your money back as long as you are under the FDic limits. Even if the bank fails for some reason, you will get your money back. So super duper safe insured deposits.
Caitlin [00:08:55] Kind of exciting this idea that instead of the money being in my savings or checking account it's in a CD and so it might like my money is making me money and I'm not doing anything and it's very tangible and it is very safe and I can see I know what I'll get at the end of it
Sara [00:09:12] Super exciting. These are like the most boring thing you could possibly invest in. And that is exciting for some people, right? Yes. So yes, it depends on what you get excited about. No risk.
Caitlin [00:09:27] What you get excited about. This is no risk.
Sara [00:09:30] Yes, it's no risk. And so if you are excited about no risk, this is the strategy for you. Okay. So back to the latter aspect. Let's say instead of $5,000, you have $20,000. You think that maybe you don't need the money until a year from now. Okay. You have$ 20,000 you kind of have a bunch of choices. But let's just focus on two choices. One choice is you put the whole $20,000 into a one-year, 12-month CD. At whatever the rate is, 4%. So you're like, great, I'm gonna give, lend, sorry, lend $20,000 to the bank. And at the end of 12 months, I will get my $20 thousand back and the interest that I've accumulated. I'll get it all back in 12 months. What if you think you might need some of it or you just want access to some of it three months from now? Okay. You can take your twenty thousand dollars Let's say you divide it into four chunks, and you invest $5,000 in a three-month CD, $5000 in six-months CD, $5K in a nine-month's CD, and $5k in a 12-month cd. Now you've created a ladder where each maturity date is a rung of the ladder.
Caitlin [00:10:52] But I'm going to have to track it so that I'm like, oh, that $5,000 is coming up in three months. So then I'm gonna have to make a decision, either spend or decide what to do with that money or spend part of it, do something. And then again in six months, so my Google calendar all of a sudden is filled up with all these money decisions coming down the bank. Yes.
Sara [00:11:13] Yes, yes, yes to all of those things. So you might do this in an interest rate environment like we've been in where a three month rate is higher than a 12 month rate. So the idea is when your three month matures, you either spend it because that has been the plan all along or you take that money and you reinvest it in a new 12 month CD. Because now your 12 month CD, it's been three months, now your twelve month CD matures in nine months. And your six month CD matures in three months because we're going through time. Does that part make sense? A nightmare. I thought you thought it was exciting.
Caitlin [00:11:59] Well, doing one with one chunk of money that will make me money in two years, but not every three months having to reengage with the cycle and the prediction and the maneuvering.
Sara [00:12:14] Yes, so some people do find this very exciting if you have a sense as to how interest rates are moving, or you can do the research and always be figuring out where on the yield curve am I getting the most bang for my buck, then it does turn into, for a certain type of very, very conservative investor, it's, it To me, it's yield searching, like yield hunting, in the same way that people will search for the highest high yield savings rate at different banks. Which I have done. Got it. OK. So it's a similar exercise. But the idea is you're keeping it. You're trying to get the highest yield. And you're also trying to optimize for liquidity, which means when your investment turns into money that you could possibly use. So that's why it would be, for many people, more appealing to have. I mean, think about like a 10-year CD ladder. Let's say you have enough money set aside for 10 years of living expenses. And your plan is, okay, every year, a CD is going to come due, and that's gonna be my spending money for the rest of that year. And then the following year, another rung of the CD ladder is going to come do, and that is going to be my living expenses." So you can do it on a monthly basis, you can it on an annual basis, and just the idea is once the first rung of the ladder matures, you're right, you have a decision to make. Now what do I do with this money? Do I spend it? Do I reinvest it in another rung of the CD ladder? Do I invest it in something riskier? Do I give it away? What do I with it?
Caitlin [00:14:00] The main point is when you put something in an investment account or your retirement account, you're really saying, unless there are unforeseen circumstances that are dramatic, I am not going to touch this money until I retire. And CD money would be money where, hey, this could be part of my emergency saving, that I have it somewhere much more accessible and near or a little bit further down the line, but it's not frozen beyond my reach. Until much later.
Sara [00:14:32] Right. I mean, because there's also in your retirement account, unless you are incredibly conservative, you probably would not put a CD ladder in your retirement account. Maybe if you were drawing money out of the retirement account part of it would be in the CD ladder. But a CD latter is always going to be it's incredibly conservative because you are not taking any risk at all. It's FDIC insured.
Caitlin [00:15:01] So no risks mean, I know I'm going to get that 4% interest rate, but it also means when the market is, the stock market is doing really well, I will not benefit from any of that profit that is the money was there.
Sara [00:15:16] Right, there's no chance. So with a CD you will know exactly to the penny how much money you will receive and exactly the schedule on which you will receive it.
Caitlin [00:15:27] So given the scale, the difference there, let's see if I can map this out to see what I might actually be losing out on. I do a CD for five years, $20,000, that gets a 4% interest rate for a CD. I don't even know what the normal range is, but let's look at that. No, that's pretty good. And at that same time period, the stock market, had I put the $20,000 in a. Very well diversified index fund, it might have made 10%. So I just lost potential earnings of 6%, which is a number I cannot calculate and will not calculate, but I can understand that there is a big difference between earning a 4% interest on my money and a 10%. I bet we could do the 10% one. Do you want me to do the calculation? Because it doesn't seem like that, the difference between 4% and 6% doesn't really seem like that big of a deal if something is completely watertight and safe. But it does, if this is money, this isn't fun money, this is the money I really am going to need to pay my rent or pay my mortgage, it could be the difference between several mortgage payments, right?
Sara [00:16:51] Yes, let's come back to that point in a second. So if it's $20,000, that's our present value, right? So I have that in my financial calculator. And you said option one is we put it in a five-year CD. So when that CD pays out to us, we should get about $24,333 when all is said and done.
Caitlin [00:17:15] That's what I was thinking in my head.
Sara [00:17:18] So we earned a little over $4,000 over the five years. Okay. So now if we make a different choice and we take that $20,000 and we put it into something much riskier over five years, let's say that everything works out great.
Caitlin [00:17:30] Exactly, and we're withdrawing the money at a time when their market is up rather than just crashed.
Sara [00:17:36] Right, so 60 months from the date you did that, everything's fine, the market's up an average of 10% over those five years, compute future value, you would have over $32,000. So it's a difference over a five-year time period between $24,000-ish and $32000, which is a lot of thousands of dollars. But in this situation, as you know, over a 5-year-time horizon, the stock market might be up 10% per year, or it might be down, or it may be sideways. Yeah. There's no guarantee as to what the interest rate is. So over a short time horizon, that's typically how people use CD ladders.
Caitlin [00:18:18] Like, share, and subscribe.
Sara [00:18:19] In the short term, I am not going to take risk on money that I know I need to buy a house, build a house pay for college, fund some years of retirement, buy a car, whatever the things are that people do in the short-term. You don't want to take risks because what if you're wrong about the 10 percent rate of return in the stock market and it's actually a zero percent rate of return, instead of having
Caitlin [00:18:41] leave it in much longer to be able to get it to go back up and then you don't have access to that money.
Sara [00:18:48] Exactly, because in risky investments like the stock market, we need more time to get more and more, never perfectly certain, but more and more certain about what we think the rate of return will be.
Caitlin [00:19:02] So what this is making me think is that you would endorse people who have the time, patience and organization to do a CD ladder with money that they really do need to have access to in the short term. Short term being less than 10 years. So not taking that riskier approach really does make sense then. But you have to be really intentional. Is this money that you need it to grow a lot more to be able to survive in retirement? Or is it okay that it's not gonna grow as much because you have other money doing that growing in the stock market?
Sara [00:19:41] Yes. I mean, and I wish that I could show you right now, like the amount of work that this is, like, we have a full-time person in our office who she doesn't just do CDs, but a lot of her time is spent identifying the term of the CD, that means how long it is to maturity, what rates are available, and keeping track of those maturity dates. I, mean, it's across hundreds of clients, right? So, but.
Caitlin [00:20:11] Happens every day. Even if it was just one client, if it was just me, I'd still be having to do that work every three months or whatever.
Sara [00:20:19] Correct. If you are in a relationship with a bank, the bank down the street, and you have a personal relationship in there, they would probably say something like, OK, we'll just automatically roll it over every three months. So your three-month CD will mature, and unless you tell us different, we're just going to roll it into another three months. Right? So depending on the bank, that might be an option. If I just want keep rolling it forward. I mean, that also has its drawbacks, because inevitably... It gets rolled over the exact time when you need the money. And now you have to wait another three months. And it's, you know. And you're not sure.
Caitlin [00:20:55] Well, and you're not shopping around. Like, your convenience factor is there. But then you're optimizing for the competitive interest rates. So you're kind of choosing this middle option for the convenience, which I totally get. But then if you're doing such a short-term one again and again, you might be missing out on better interest rates because you're not checking them out.
Sara [00:21:18] Can I, like on that note, can I tell you something that maybe your Facebook group already knows but probably think is really exciting? Is it insider trading? Gosh, I'm going to whisper it like this is the only stock you'll ever need pencil. Oh, yeah. No, it's not. It's about CDs. So, you know, CDs, again, it's a lending relationship between you and the bank. Yeah. So most people typically think of that in the situation I described, like there's a bank down the street from you, you walk into the branch, you give them your $5,000, they give you a little certificate of deposit, an actual certificate, and you have a relationship with that. You're making the loan to that particular bank. There is a whole other marketplace. We usually call those primary markets for CDs. There's a whole area of secondary market for CDs that you can access through your brokerage account. So we use Schwab, but Fidelity, E-Trade, whoever, whoever your broker is. Instead of being limited to the banks that operate in Austin, Texas, or Petaluma, California, or wherever you are, you get access to all of the CDs issued by any bank that wants to list them in the secondary marketplace at your broker.
Caitlin [00:22:47] Okay.
Sara [00:22:49] The way that's a benefit to you is maybe the bank down the road only offers 2% on 12 month CDs. But I know that there's a bank in Arkansas that is offering 4.3%. So because they're FDIC insured, and typically you're not restricted from state to state that can sometimes you can be restricted from State to State, but typically you It just it opens up the universe of CDs that are available to me. I'm not limited to what's available in Austin. I can go nationwide.
Caitlin [00:23:21] Let me tell you something. When I did live in Austin, Texas, I googled best CD interest rates, I found an internet bank called Synchrony, and I just directly did one with them. They still send me mail. Yeah, I think there's others like Ally. I don't know if they have a brick and mortar anywhere. I think that they probably don't. But whatever happened, I got a CD from them because at the time I was looking, they had the best interest rate.
Sara [00:23:52] Yes. So you can I am a little bit I'm impressed. I'm not shocked. I impressed. Yes, I mean, so that is, it's the same general idea where there's like the internet can show you what the marketplace is and what the market place looks like. Or you're inside your brokerage account, they can just give you a list of the CDs. And why I like the brokerage, account is typically the way they'll show you is they'll show you the terms, right, three months, six months, nine months, 12 months, two year, three year, five year, 10 year, and then they'll show you the interest rates available at each term so that you can decide, like, okay, well, three month CDs are at 4.2% and one year CDs are 3.9%. If you're getting really fancy, then you start thinking about the direction of short-term interest rates between now and 12 months from now. Do you know what direction? The Federal Reserve is going, are they raising rates? Are they going to probably reduce rates? Are rates gonna stay the same? Because you might say, like even though the 12 month CD at 3.9% is lower than 4.2, I think that by the time we get 12 months from now, rates are actually going to be at three and a half at the three month end. Okay. So you can lock in 3. 9 on a one year CD. If you think that over that one year time horizon, rates are going to go down.
Caitlin [00:25:23] Okay, meaning you might get all this fancy extra interest for the first three months, but if the interest rates then go down for the shorter term ones, you would have done better to just lock into the longer term one at a rate that will probably still be higher than the... Oh my.
Sara [00:25:45] I know. So boring. It's so I told you it's so boring. But this is so three years ago. Three year rates were at four and a half percent, which was lower than the five and a half percent that you could get on a three month CD. And so we have people who locked in the four and half percent. Yeah. They're still receiving interest at four a half percent until their CDs mature. Even though rates are much lower now.
Caitlin [00:26:17] Okay, okay, so they're feeling pretty smug like all right. I'm still as long as this CD it hasn't matured yet not still total juvenile, then I'm still getting this better interest rate than I could get if I was buying the same product or lending the money. I had an epiphany, a CD is to a bank what a bond is to the government.
Sara [00:26:50] Yeah, that's pretty close. Yes.
Caitlin [00:26:53] It's when we, the little people, are lending money to these institutions. What does that like contract look like in the interest? Correct. Okay. Yes. And like bonds, CDs are the boring stepchild, the boring younger siblings of stock, the more risky, sexy stock market stuff. Yes. Okay.
Sara [00:27:14] CDs and bonds will always, over the long run, have a lower rate of return because they're so safe. Most of the time, they get paid back in full. CDs almost always get paid back in whole because they are FDIC insured. So they'll always have a lower rate or return over long periods of time. But that doesn't mean that whatever rate of return you can get in the short term is not compelling. Right? Like most people like a four percent. Return on super duper safe money. People enjoy that.
Caitlin [00:27:46] We don't know them, but people do. Yeah. I've heard that some people like that. Amateurs. OK. So before I really fall asleep, is money our money? Have you said what you mean? You asked the question. I know, but I regretted it immediately when you started. Have we really said the most about what people need, the bare minimum people need to know about CD ladders? Like, do you feel like that's enough that? I think our work is done here on CD ladder. Okay. Money markets. What the fuck is a money market account? Just when you thought it couldn't get any worse.
Sara [00:28:32] Oh my gosh. All right. Yes. So money markets. I mean, I had never thought of it this way until you said a money market, like a stock market, at the very beginning, because that is kind of what it is. So I mean most people I think realize that the financial system is way bigger and more complex than what we from a day to day have contact with. So you have these massive financial institutions. So let's just think about big, huge banks. They have overnight lending requirements, where like, okay, maybe if you have a bunch of money that's going to go out the next day, you want to make sure you have enough money in your bank to fund that just for one day, and then you pay the loan back. So there's a what's called an overnight lending rate and like an overnight, lending market where banks are lending money to each other. So, these very, very, short-term rates. Are usually mostly applicable to banks doing this type of lending. And this is the rate that the Federal Reserve actually sets when we're talking about the Federal Reserve, the Fed funds rate. It's that overnight lending rate. Anywho, the money market. It.
Caitlin [00:29:48] Tell me when I can tune back in. Not yet. Keep going, keep going. I got my cigarette, my tab cola.
Sara [00:29:58] So money markets are basically like, think of them like mutual funds for very, very short term bonds, or loans, or CDs.
Caitlin [00:30:11] Okay.
Sara [00:30:12] Or pieces of paper, someone owes you some money and they'll pay you in one day or two days plus interest. So money markets tend to offer you interest that is almost as high as the federal funds rate. So if we know that banks are lending to each other at, I know I should know what the Something.
Caitlin [00:30:40] Listeners come at us. We got it wrong. We didn't even know it existed.
Sara [00:30:45] Let's say the Fed funds rate is at 4.25%. And so we know that banks are lending to each other around 4. 25% in a one-day, two-day overnight time period. Money markets will invest in those very, very short-term pieces of paper, like contracts, in order to receive the 4. 0.25% interest and pass it along to their money market shareholders. All that to say, it's not guaranteed, right? So it's FDIC insured because these are technically at risk, these pieces of paper. What if the bank who owes you a gajillion dollars tomorrow does not pay you back? So there is a little bit of risk. And this really came into focus during the financial crisis, 2008, 2009. There was one or two days where the fear that one bank wasn't going to pay another bank back the next day did spike, that risk spiked. And so it's not risk-free, but most of the time there is very, very little, very, very, very, very minuscule amount of risk. And in exchange, you get a slightly higher rate of return than you might get in a high-yield savings account, or maybe a.
Caitlin [00:32:06] So it's a tool, a product the banks invented to cover their asses overnight.
Sara [00:32:14] Well, it's the market to cover to do the overnight lending, just sprouted up with the financial system. And then the money market piece supports that lending arrangement. Right. So this is like of utmost vital importance to the workings of the economy, that this type of market exists, because it allows lending to happen to regular people down the line. Right? Like the first is the banks have to trust each other. They have to be able to borrow and lend from each other very, very easily, seamlessly, at some interest rate. If banks won't lend to each other, like pretty recently, like, I don't know, I like my Federal Reserve history that well, maybe lasts like 10 years, maybe 20 years, the Federal Reserve itself will actually backstop this relationship to make sure, like it is, it could not be more important to the financial system for. Banking institutions to trust each other in this overnight lending environment, like the system that is set up to do that. We are kind of like funding the liquidity of that market too. You need as many participants as possible in order to make it work smoothly.
Caitlin [00:33:26] Is there a point where society is going to say we've actually made this system so complicated? There's no way we can continue. Like it is just too, like some board game that no one could ever learn all the rules to and there's just too many little pieces on the board and there is no movement possible. Like this just seems insanely complicated. And I know we did an episode, what the fuck is a bank? Which I'm so glad we did before because it's the only way I can follow part of what you're saying because I always thought that the bank had all the money I gave it in the back room, in the safe. And they're fucking handing it out every night to other banks. And then other banks are worried that they're not gonna have money. Just keep the money people like me put in you and you'll have it. I obviously like they made it so complicated and all we can do is like ride along and trust that. It all makes sense and is safe, but I just can't believe how complicated this is.
Sara [00:34:31] Yeah, I mean, it does definitely flow back through to banking regulations in the US and globally. What are banks required to do? What are they incentivized to do, what are they forced to do what are they restricted from doing in order to keep this system afloat right like anytime in the banking system, you lose even a little bit of trust. It's all I mean so a cynic would say like it's a house of cards. If one piece breaks down that it all starts crumbling, right? Which is probably like a somewhat fair assessment, but it's also what enables economic growth and it enables normal people to get a loan, right. Like if like the banks need to be able to trust each other first before anyone's gonna trust you with any money, right, like there's so many like layers of trust that need to built up in the system. And so, bankers, central bankers. Um, very, very smart economists, federal regulators, politicians, like all of these people are always trying to create, sorry, craft.
Caitlin [00:35:40] And create and craft. Yeah.
Sara [00:35:44] They're trying to set the rules for how this all works, right? And there are people who are brilliant banking experts who know a good jillion more times about this than I do. But from it's very basic level.
Caitlin [00:35:59] Remind me never to invite them on this podcast. I don't want to know.
Sara [00:36:06] I mean, it's so boring, which is why the vast, vast, vast majority of people check out. And so you have like a handful of people who know this well enough and are well versed enough in it. That makes me very nervous. And get paid the big bucks, right? Because most of us are like, that is too complicated, but you have very, very powerful centers of influence in New York and London and Hong Kong who know all of this stuff. Right, and are incentivized to keep this system, keep the system moving. So money markets are a part of that. I mean, so I digress, like again, if we're doing like the short version, it's if you are incredibly concerned about the risks in the financial system, you might not choose a money market because it's not insured, right? That if you look at a money market that you buy like in your Schwab account, you'll see that the price of the money market for one share of the Money Market, it's $1, regardless of the Monday Market. So if I put $50,000 in the Schwab Money Market it will say I have 50,000 shares worth $1 per share.
Caitlin [00:37:21] The dollar is the share.
Sara [00:37:23] Yes, it's always priced at a dollar with the exception of those couple days that I talked about during the financial crisis. And that was a humongous, huge deal where the price of money market for like one day, maybe it was a few hours, it was for some point in time broke the buck is how they say it. It broke the book. So people were so panicked that they were pulling money out of this very, very safe money market fund and they were willing to accept 99 cents. When if they had waited a day they would have gotten a dollar, right, but they were so afraid that they were willing to just take the 99 cents and call it a day. That is like extreme panic and not, that does not happen very often. But if you were very, very worried about that.
Caitlin [00:38:10] What if you don't know about it so you're not worried about it? When would you consider a money market account versus a CD? Are they in the same arena?
Sara [00:38:21] They are in the same arena, but it's like a different maturity date. So the money market, again, because it's, they're very, very short-term loans. It has next day liquidity. So if I have $50,000 in the money, market today, as long as I sell my shares before the market closes at three tomorrow, if I need $20,000, I sell 20,000 shares of my money market. I come back tomorrow and I have $20,000 instead of 20,000 shares of the money market. So now I have the dollars and I can pay my bills that day or the next day. With the CD, you're locked up until maturity. So if you're in a three month CD, maybe like, oh, like, shit, like I forgot that I needed to pay something next week. Sometimes you can cash in the CD but you take a haircut, you get penalized for it, whereas the money doesn't have any of that. So it's almost, it's cash-like. In that it's basically like next day, next business day liquidity, instead of needing to wait for the maturity date on a CD. So it's like an overnight CD is kind of how you can think about it minus the FDIC insurance.
Caitlin [00:39:33] Okay. And so are you gaming that system all the time? Are you up at 3 a.m. Looking at what the rates are every night? So you make choices about what, like, how involved is a decision to put some money in a money market account?
Sara [00:39:49] I mean, yes and no, like the question usually solves itself based on the questions that we're talking to clients about, right? Like, when will you need this money, right, if it's for sure, I'm not going to need it this year, I have plenty of other cash on hand, like there's no chance I'm going to need it in the next 12 months, then we probably look at CDs and look at US treasuries, which are bonds from the US government, and figure out what's highest. Right, like over the next 12 months, we think we'll get a higher rate of return in CDs. Sometimes that happens some days. Some days it's a higher return in treasuries and some days it might be a higher return in money market, right? But typically it's between CDs and treasurys. If a client says like, yeah, I'm pretty sure that I'm not gonna need the money but you never know, like my car might need some repairs or then it's like, okay, then just take the liquidity. And a relatively high interest rate and just chuck it in the money market, right? So I would say the default is a money market. And then only if you can get a higher interest rate would you go into a CD and lock up your money or go into a bond, which has price fluctuations. But sometimes it's worth it, right, if you get 4.14% on the Schwab money market as of yesterday, which I looked, so I'm pretty sure that's accurate. If you get four point one four percent in the to 5% in an FDIC-insured CD, you try to figure out which one is best for the client in whatever situation they're in.
Caitlin [00:41:29] Listeners, I'm sorry if you're really getting a lot out of this. I'm at the end. I have reached my maximum capacity.
Sara [00:41:39] I'm definitely looking at Caitlin like as she's sleeping with her eyes open on the Zoom call.
Caitlin [00:41:45] Hello, I'm so glad that you know a lot about these subjects. I mean, I think everybody should know about them when you're making decisions about the money that's not gonna go into your retirement accounts and that you don't wanna sit in your checking account. It sounds like a viable thing to look and choose whether a CD makes sense for you, a CD ladder or putting money in a money market account. Is that a reasonable thing to say?
Sara [00:42:12] Yeah, or your high yield savings account, which is also FDIC insured.
Caitlin [00:42:16] We did a whole episode about that, so you're gonna have to go back in the back room for that one. Basically, you're doing research about what interest rates are, and they're not going to be as much as the stock market, but they have other advantages, so it should be the money you need closer contact with in the shorter term.
Sara [00:42:37] Yeah, and I will say like all of these calculations do make more sense the more dollars that you have to invest in the CD ladder. If we're talking about a thousand dollars or five thousand dollars, just make a decision and move on with your life. Like the number of dollars that you can make between a four point one four percent money market and a four point two five percent CD are minuscule and not worth your time. So it does start, I mean like our clients. Tend to have like maybe like a relatively lot of money that they want to keep safe for something, right? So then it really adds up to like, you know, a certain number of dollars, right? Like it's better than a sharp stick in the eye. Right. But if you're just doing the best you can with a thousand dollars, five thousand, ten thousand, even like twenty thousand dollars. Right. Like if you know generally what rates are. So if people today know generally, you can get four percent if you do a little bit of digging. That might be a noticeable improvement over the 0% that you get at your credit union or your big bank. But the difference between 3.75% in your high yield savings account that you already have and 4.14% in the Schwab money market might be like, why bother? It's just like the paperwork. Additional complexity is not worth the number of dollars that you would actually make by changing the way you do things.
Caitlin [00:44:07] Your time is valuable to people. Yes, yes. Thank you, Sara. Let's never talk about either of these topics ever again. Thank God, thank God. Do you have a question about finance or investing? Send it to us in an email or voice memo to our website, womenontheverge.com. Don't worry, Sara will answer it, I won't.
Sara [00:44:32] Hey, Women on the Verge, we want you to know that economic abuse isn't always obvious, but it's a powerful form of control. Maybe a partner limits your access to money, sabotages your work, or racks up debt in your name. If any of this feels familiar, please know you're not alone and support is out there. Learn more at thehotline.org or call 800-799.
Caitlin [00:44:57] Our podcast is edited by our co-producer, Kelly West, with music by BadBadHats and Debmo. I know the first thing you notice is that I'm cuffed in
Sara [00:45:17] This podcast contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. PASS performance is no guarantee of future results. There is no guaranteed that the views and opinions expressed in this podcast will come to PASS. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not considered as a solicitation to buy or sell any security.