The money market is where short-term debt and lending takes place; the capital market is designed for long-term assets, such as stocks and bonds. The former is considered a safer place to park one’s money; the latter is seen as riskier but potentially more rewarding. While the money market and the capital market are both aspects of the larger global financial system, they serve different goals for investors.

Understanding the difference between money market and capital market matters plays a role in understanding the market as a whole. Whether you hold assets that are part of the money market vs. capital market can influence your investment outcomes and degree of risk exposure.

What Is the Money Market?

The money market is where short-term financial instruments, i.e. securities with a holding period of one year or less, are traded. Examples of money market instruments include:

•   Bankers acceptances. Bankers acceptances are a form of payment that’s guaranteed by the bank and is commonly used to finance international transactions involving goods and services.

•   Certificates of deposit (CDs). Certificate of deposit accounts are time deposits that pay interest over a set maturity term.

•   Commercial paper. Commercial paper includes short-term, unsecured promissory notes issued by financial and non-financial corporations.

•   Treasury bills (T-bills). Treasury bills are a type of short-term debt that’s issued by the federal government. Investors who purchase T-bills can earn interest on their money over a set maturity term.

These types of money market instruments can be traded among banks, financial institutions, and brokers. Trades can take place over the counter, meaning the underlying securities are not listed on a trading exchange like the New York Stock Exchange (NYSE) or the Nasdaq.

You may be familiar with the term “money market” if you’ve ever had a money market account. These are separate from the larger money market that is part of the global economy. As far as how a money market account works goes, these bank accounts allow you to deposit money and earn interest. You may be able to write checks from the account or use a debit card to make purchases or withdrawals.

💡 Quick Tip: Don’t think too hard about your money. Automate your budgeting, saving, and spending with SoFi’s seamless and secure mobile banking app.

How Does the Money Market Work?

The money market effectively works as a short-term lending and borrowing system for its various participants. Those who invest in the money market benefit by either gaining access to funds or by earning interest on their investments. Treasury bills are an example of the money market at work.

When you buy a T-bill, you’re essentially agreeing to lend the federal government your money for a certain amount of time. T-bills mature in one year or less from their issue date. The government gets the use of your money for a period of time. Once the T-bill matures, you get your money back with interest.

What Is the Capital Market?

Capital markets play an important role in the U.S. and world economies. Capital markets are where entities can raise capital by issuing stock, bonds, and other longer-term securities, and investors can purchase these securities with an eye toward growth potential.

The capital market can be further segmented into the primary and secondary market. Here’s how they compare:

•   Primary market. The primary market is where new issuances of stocks and bonds are first offered to investors. An initial public offering or IPO is an example of a primary market transaction.

•   Secondary market. The secondary market is where securities that have already been issued are traded between investors. The entity that issued the stocks or bonds is not necessarily involved in this transaction.

Recommended: What Is an Emerging Market?

How Does the Capital Market Work?

The capital market works by allowing companies and other entities to raise capital. Publicly-traded stocks, bonds, and other securities are traded on stock exchanges. Generally speaking, the capital market is well-organized. Companies that issue stocks are interested in raising capital for the long-term, which can be used to fund growth and expansion projects or simply to meet operating needs.

In terms of the difference between capital and money market investments, it usually boils down to three things: liquidity, duration, and risk. While the money market is focused on the short-term, the capital market is a longer term play. Capital markets can deliver higher returns, though investors may assume greater risk.

Understanding the capital market is important because of how it correlates to economic movements as a whole. The capital market helps to create stability by allowing companies to raise capital, which can be used to fund expansion and create jobs.

Differences Between Money Markets and Capital Markets

When comparing the money market vs. capital market, there are several things that separate one from the other. Knowing what the key differences are can help to deepen your understanding of money markets and capital markets.

Purpose

Perhaps the most significant difference between the money market and capital market is what each one is designed to do. The money market is for short-term borrowing and lending. Businesses use the money market to meet their near-term credit needs. Funds are relatively safe, but typically won’t see tremendous growth.

The capital market is also designed to help businesses and companies meet credit needs. The emphasis, however, is on mid- to long-term needs instead. Capital markets are riskier, but they may earn greater returns over time than the money market.

Length of Securities

The money market is where you’ll find short-term securities, typically with a maturity period of one year or less, being traded. In the capital market, maturity periods are usually not fixed, meaning there’s no specified time frame. Companies can use the capital market to fund long-term goals, with or without a deadline.

Financial Instruments

As mentioned, the kind of financial instruments that are traded in the short-term money market include bankers acceptances, commercial paper, and Treasury bills. The capital market is the domain of stocks, bonds, and other long-term securities.

Nature of Market

The structure and organization of the money market is usually informal and loosely organized. Again, securities may be traded over-the-counter rather than through a stock exchange. With the capital market, trading takes place primarily through exchanges. This market is more organized and formalized overall.

Securities Risk

Risk is an important consideration when deciding on the best potential places to put your money. Since the money market tends to be shorter term in nature, the risk associated with the financial instruments traded there is usually lower. The capital market, on the other hand, may entail higher risk to investors.

Liquidity

Liquidity is a measure of how easy it is to convert an asset to cash. One notable difference between capital and money market investments is that the money market tends to offer greater liquidity. That means if you need to sell an investment quickly, you’ll have a better chance of converting it to cash in the money market.

Length of Credit Requirements

The money market is designed to meet the short-term credit requirements of businesses. A company that needs temporary funding for a project that’s expected to take less than a year to complete, for example, may turn to the money market. The capital market, on the other hand, is designed to cover a company’s long-term credit requirements with regard to capital access.

Return on Investment

Return on investment or ROI is another important consideration when deciding where to invest. When you invest in the money market, you’re getting greater liquidity with less risk but that can translate to lower returns. The capital market can entail more risk, but you may be rewarded with higher returns.

Timeframe on Redemption

Money market investments do not require you to hold onto them for years at a time. Instead, the holding period and timeframe to redemption is likely one year or less. With capital market investments, there is typically no set time frame. You can hold onto investments for as long as they continue to meet your needs.

Relevance to Economy

The money market and capital market play an important role in the larger financial market. Without them, businesses would not be able to get the short- and long-term funding they need.

Here are some of the key differences between money markets and capital markets with regard to their economic impacts:

•   The money market allows companies to realize short-term goals.

•   Money market investments allow investors to earn returns with lower risk.

•   Capital markets help to provide economic stability and growth.

•   Investors can use the capital market to build wealth.

Money Market	Capital Market
Offers companies access to short-term funding and capital, keeping money moving through the economy.	Provides stability by allowing companies access to long-term funding and capital.
Investors can try to use interest earned from money market investments to preserve wealth.	Investors can try to use returns earned from capital market investments to grow wealth.
Money market investments are typically less volatile, so they’re less likely to negatively impact the financial market or the investor.	Capital market investments tend to be more volatile, so they offer greater risk and reward potential.

Deciding Which Market to Invest In

Deciding whether to invest in the money market or capital market can depend on several things, including your:

•   Investment goals and objectives

•   Risk tolerance

•   Preferred investment style

If you’re looking for investments that are highly liquid and offer a modest rate of return with minimal risk, then you may turn to the money market. On the other hand, if you’re comfortable with a greater degree of risk in exchange for the possibility of earning higher returns, you might lean toward the capital market instead.

You could, of course, diversify by investing in both the money market and capital market. Doing so may allow you to balance higher-risk investments with lower ones while creating a portfolio mix that will attempt to produce the kind of returns you seek.

Alternatives to Money and Capital Markets

Aside from the money and capital markets, there are other places you can keep money that you don’t necessarily plan to spend right away. They include the different types of deposit accounts you can open at banks and credit unions. Specifically, you may opt to keep some of your savings in a certificate of deposit account, high-yield checking account, or traditional savings account. Here’s a closer look:

High-Yield Checking Accounts

Checking accounts are designed to hold money that you plan to use to pay bills or make purchases. Most checking accounts don’t pay interest but there are a handful of high-yield checking accounts that do.

With these accounts, you can earn interest on your checking balance. The interest rate and APY (annual percentage yield) you earn can vary by bank. Some banks also offer rewards on purchases with high-yield checking accounts. When looking for an interest-checking account, be sure to consider any fees you might pay or minimum balance requirements you’ll need to meet.

Traditional Savings Accounts

A savings account can be another secure place to keep your money and earn interest as part of the bargain. The different types of savings accounts include regular savings accounts offered at banks, credit union savings accounts, and high-yield savings accounts from online banks.

Of those options, an online savings account typically has the highest interest rates and the lowest fees. The trade-off is that you won’t have branch banking access, which may or may not matter to you.

The Takeaway

There are lots of reasons why people do not invest their money. A lack of understanding about the difference between money market vs. capital market investments can be one of them. Once you understand that the money market typically involves short-term, lower-risk debt instruments, while the capital market likely revolves around longer-term ones with higher risk and reward, you will be on your way to better knowing how the global financial market works.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

What are the similarities between a money market and capital market?

Both the money market and the capital market are intended to make it easier for businesses and companies to gain access to capital. The main differences between money markets and capital markets are liquidity, duration, and the types of financial instruments that are traded. Both also represent ways that consumers can potentially grow their money by investing.

How is a money market and capital market interrelated?

The capital market and the money market are both part of the larger financial market. The money market works to ensure that businesses are able to reach their near-term credit needs while the capital market helps companies raise capital over longer time frames.

Why do businesses use the money markets?

Businesses use the money market to satisfy short-term credit and capital needs. Short-term debt instruments can be traded in the money market to provide businesses with funding temporarily as well as to maintain liquid cash flow.

---

About the author

---

Photo credit: iStock/AndreyPopov

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

SOBK-Q224-1945699-V1

Read more

Investing for a comfortable retirement might be challenging if you’re also trying to pay down debt. Dedicating more of your budget to debt means you might have less to invest. You might consider paying off certain debts after retirement so that you can save more now, but that can have disadvantages as well.

If you expect to have debt in retirement, it’s important to know how to manage it.

Retiring With Debt

One of the first steps in retirement planning is determining how much money you’ll need to meet your expenses once you stop working. The numbers might be inflated if you’re paying off retirement debt on top of funding basic living expenses. Working out a realistic budget that includes debt repayment is critical for determining how much you’ll need to save and invest.

How Much Debt Is Common to Have in Retirement?

Having debt in retirement is fairly common among older Americans. In fact, roughly two-thirds of seniors between the ages of 65 and 74 carry some level of debt, and half of those over 75 do.
In terms of how much debt retirees have by age, here’s how the numbers break down.

Age Range	Median Debt	Mean Debt
55 to 64 years old	$71,290	$168,940
65 to 74 years old	$46,370	$122,010
75 and older	$33,620	$101,200

Source: Survey of Consumer Finances, 2019-2022.

The types of debt you might have at retirement may include:

•   Mortgage loans

•   Home equity loans or lines of credit

•   Student loans, either for yourself or loans you’ve cosigned for your child

•   Vehicle loans

•   Credit card balances

•   Medical bills

•   Personal loans

•   Business loans

A reverse mortgage is another form of debt, though it typically doesn’t have any repayment obligation. Reverse mortgages allow eligible seniors to tap into their home equity as a secondary income stream. The mortgage is typically repaid when the homeowner passes away and the home is sold.

Tips for Managing Debt in Retirement

If you have debt, retirement might feel a little more stressful, financially speaking. You might be torn between trying to manage retirement expenses while also making a dent in your debt balances.
Here are a some simple tips for managing debt in retirement:

•   List out each debt you have, including the remaining balance owed, monthly minimum payment due, and the interest rate.

•   Consider whether it makes sense to use the debt snowball or debt avalanche method to repay what’s owed.

•   Consider contacting your credit card issuers to ask for an interest rate reduction.

•   If no rate reduction is offered, look into 0% APR credit card balance transfers to save money on interest.

•   Automate payments if possible to avoid late payments, which can trigger fees and potentially damage your credit score.

•   Research debt consolidation loan options to see if you might be able to save money by combining multiple debts.

•   Prioritize repaying debts that are secured by collateral, such as your mortgage or a car loan.

•   Weigh the pros and cons of using a home equity loan or line of credit to consolidate unsecured debts.

•   If you owe private student loans, consider shopping around for refinancing options which might help you to lower your interest rate.

•   Avoid taking on new debt unnecessarily if possible.

If you’re truly struggling with debt in retirement, there are other things you might consider including a debt management plan, credit counseling, debt settlement, or even bankruptcy. Talking to a credit counselor or financial advisor can help you decide if any of those possibilities might be right for you.

And if you need to get started saving for retirement, you can look at your options to open an online IRA.

Using Retirement to Pay Off Debt

If you have retirement savings in a 401(k) or similar workplace plan, you might be tempted to withdraw some of the money to pay off debt. For example, you might decide to take a 401(k) loan to pay off credit cards or other debts. You’d then pay back the loan paying interest to yourself.

It sounds good on the surface, but using retirement savings to pay off debt can be problematic in more ways than one. For one thing, money you take out of your 401(k) or another retirement account doesn’t have the chance to continue growing through the power of compound interest. That could leave you with a sizable savings gap once you’re ready to retire.

You might be paying interest back to yourself with a 401(k) loan but the rate you’re earning might be much less than you could have gotten if you’d left the money in place. Additionally, your employer might not allow you to make new contributions to the plan until the loan is repaid in full.

More importantly, you could end up with a tax liability for a 401(k) loan. If you leave your employer with a loan balance in place, you’ll have to pay it all back at once. If you can’t do that, the IRS can treat the entire loan amount as a taxable distribution. For that reason, using a 401(k) loan to pay off debt is one of the most common retirement mistakes you’re usually better off avoiding.

Getting Out of Debt Before Retirement

If you’d like to retire debt-free or as close to it as possible, it’s better to start working on repaying what you owe sooner rather than later. How you approach paying off debt before you retire can depend on how much you owe, what types of debt you have, and how much money you have to work with in your budget.

Here are a few additional tips for paying down debt before retirement.

Paying Off Your School Loans

More than 2 million Americans over the age of 55 have outstanding student debt. So, it’s not out of the realm of possibility that you might be torn between saving for retirement or paying student loans. And it’s helpful to know what debt relief options you might have. If you have federal student loans, you might be able to:

•   Enroll in an income-driven repayment plan, which might allow you to eventually have some of your debt forgiven.

•   Qualify for Public Service Loan Forgiveness if you’re working or plan to work in a civil service job.

•   Apply for other types of federal loan forgiveness, such as Nursing Corps Loan Repayment.

•   Consolidate your loans to streamline your monthly payments.

If you have private student loans, you might look into refinancing them. Student loan refinancing allows you to take out a new loan, ideally at a lower interest rate, to pay off your existing loans. Depending on how the new loan is structured, you might save a significant amount of money on interest over the long term.

Paying Off Your House

Should retirees pay off their mortgage? Entering retirement with no mortgage debt could mean much lower living expenses. But if you’re trying to pay off your home before you retire, you might have to commit substantially more of your monthly income to the payments.

If you’re interested in paying off your home faster, there are a few hacks you might try, including:

•   Paying biweekly, which allows you to make one additional full mortgage payment per year.

•   Applying your extra paycheck during a three-paycheck month to your mortgage’s principal balance.

•   Using tax refunds, bonuses, or other windfalls to pay down the principal.

You could also look into refinancing your mortgage to a shorter loan term. Doing so may raise your monthly payment, but you could get out of debt faster, potentially saving money on interest.

Paying Off Your Credit Cards

Credit cards are usually considered to be “bad” debt and you might want to get rid of them as quickly as possible, especially if they’re carrying high APRs. Transferring balances to a card with a lower or 0% rate can cut the amount of interest you pay so more of your monthly payment goes to the principal.

You could also consider a personal loan for debt consolidation, if the interest rate is lower than the combined average rate on your cards. Keep in mind that it pays to shop around to find the best loan option for your needs.

Paying Off Your Car

Car loans can come with sizable monthly payments, which may keep you from investing as much as you’d like for retirement. Refinancing may be an option, though whether you can get a new car loan may depend on the vehicle’s value and what you owe on the old loan.

Paying biweekly or applying tax refunds to your balance can help you get out of car loan debt faster if you’re not able to refinance. You could also try rounding up your card payments to the next $100 each month. So if your regular payment is $347.55, you could round it up to $400. That’s a simple hack for paying off car loan debt in less time.

Saving for Retirement

If you’re trying to save for retirement while paying down debt, it’s important to find the right balance in your budget. It’s also a good idea to know what your options are for saving and investing. That might include:

•   401(k) or 457(b) plans at work

•   Traditional and Roth Individual Retirement Accounts

•   SEP (Simplified Employee Pension) IRA, if you’re self-employed

•   Solo 401(k), if you’re self-employed

You can also invest in a taxable brokerage account, though you won’t get the same tax breaks as qualified retirement plans. If you have a high deductible health plan, you may also have access to a Health Savings Account (HSA). While an HSA is not a retirement account, per se, you could still use it to save money on a tax-advantaged basis for your future health care needs.

If you’re not sure how much you can afford to save or need to save, using a retirement calculator can help. You can revisit your plan each year to see if you have room to increase the amount you’re saving, based on changes to your budget or income.

Seeking a Financial Advisor

Getting professional financial advice can be helpful if you’re not sure how to go about creating a debt repayment plan or preparing for retirement. A financial advisor can help you figure out:

•   How much you’ll need to save to reach your target retirement goals.

•   Which debts to prioritize and how to make them less expensive so you can pay them off faster.

•   Where to focus your savings and investing efforts first (e.g., a 401(k) vs. an IRA).

•   How to diversify your portfolio to achieve the rewards you’re looking for with an amount of risk you can tolerate.

The Takeaway

Debt doesn’t have to be an obstacle to your retirement goals. Creating a debt repayment strategy and actively avoiding unnecessary debt can make it easier for you to create a secure financial future.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

Help build your nest egg with a SoFi IRA.

FAQ

Is it wise to use retirement to pay off debt?

Using retirement funds to pay off debt is generally not recommended by financial experts as it may leave you playing catch up later. Better options for paying off debt before or during retirement can include a debt consolidation loan, home equity loan or line of credit, or 0% APR balance transfer offer.

How much debt is common to have at retirement?

Federal Reserve data suggests that the typical retiree between the ages of 55 and 74 has somewhere between $71,000 and $122,000 in debt. That includes mortgage debt, student loans, auto loans, and credit card balances.

What percent of Americans retire with debt?

According to Federal Reserve data, 77% of older Americans aged 55 to 64 have debt. Among Americans aged 65 to 74, 70% have some debt while 51% of those 75 and older have debt obligations.

---

About the author

---

Photo credit: iStock/bernardbodo

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOIN1122016

Read more