Money market accounts and CDs are available at many banks and credit unions.
Both savings options typically pay higher interest rates than traditional savings accounts and offer benefits like growth that’s lower risk than some other types of investments.
But they have significant differences, and each has some drawbacks.
In this guide, we will breakdown everything you need to know about these saving accounts and the pros and cons of each.
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What is a Money Market Account?
Many banks and credit unions offer money market accounts, which are similar to both savings and checking accounts.
These accounts earn interest, like savings accounts, while also providing some of the access you get with a checking account, though with some limitations.
For example, withdrawals and payments via check, debit card, draft or electronic transfer are limited to six per month total for money market accounts.
But withdrawals or payments done via ATM or in person, by mail, by messenger or via telephone check don’t count against that limit.
The deposits you put in a money market account earn interest.
But rates can vary, so it’s wise to do some research to see which financial institutions offer the highest money market rates.
Pros:
- Higher earning: Interest rates typically higher than a traditional savings account
- Low risk: Insured by FDIC or NCUA
- Flexibility: Some features of a checking account
Cons:
- Minimums: Potential minimum deposit requirements
- Unpredictability: Typically have variable interest rate
- Limitations: Six total transactions allowed using a check, debit card, draft or electronic transfer
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What is a Certificate of Deposit?
Offered by many banks and credit unions, a certificate of deposit is a unique type of savings account that requires you to keep the funds in the account for a set period of time.
CD terms are often anywhere from six months (short-term CDs) to five years or more (long-term CDs).
At the end of the term, the CD “matures,” and you’ll receive the initial amount you put into the CD, plus the interest that accrued on that amount over the CD term.
The rate of return you receive on a CD (and other types of deposit accounts) is the annual percentage yield, or APY.
Because the financial institution holds your money for a specific length of time, CDs typically offer higher interest rates compared to traditional savings accounts and some may offer higher interest than money market accounts.
And the longer your CD term, the higher your interest rate is likely to be.
Pros:
- Predictability: Fixed interest rates (with exceptions)
- High earning: Higher rates than traditional savings accounts
- Low risk: FDIC or NCUA insured
- Flexibility: Different term lengths
- Less temptation: Funds locked for a set period of time, unavailable to spend
Cons:
- Minimums: Minimum deposit requirements
- Limitations: No access to your money while it’s in the CD
- Penalties: Costs for early withdrawals
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What is the Difference?
Both of these accounts are deposit accounts, and if they are held at FDIC-insured banks or credit unions, then your money is protected.
However, there are some important differences between money market accounts and CDs.
First of all, a money market account usually comes with check writing privileges.Most savings accounts and CDs don’t allow you to write checks.
A money market account usually lets you write a limited number of checks per month, and you might even get a debit card.
A money market account also usually has a higher APY than a savings account, although it probably won’t match the APY offered by a CD.
This higher return is because a money market account usually requires a higher minimum balance than a savings account.
However, unlike CDs, money market accounts don’t require you to keep your money in the account for a set period of time to earn the higher rate.
Which One is For You?
The decision between a money market account and a CD doesn’t have to be an either/or choice.
Money market accounts are more flexible and reward larger balances, but your interest rate is also subject to the highs and lows of the market.
CDs work for those who are willing to keep their money locked up until the end of the term to nail down rates.
But if you have cash to scatter around for different purposes, you may be served by seeking out both options.
You could put more immediate funds in an MMA, so long as you meet minimums to reap the benefits, while placing longer-term investments you don’t plan on touching right away in a CD.
Author’s Verdict
If you’re just looking to stock away money that you want to retrieve whenever you’d like, a money market account could be ideal.
By the same token, CDs are great for those who want their savings to work a little harder and don’t need the funds rapidly.
The final answer, as with all financial decisions, can only be determined by your own goals.
Let us know in the comment section below if it did! If you don’t have a savings account, see our best savings account section.
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