CDs vs Money Market Accounts: Which Is Better for You?
Here's what you need to know when deciding on CDs vs money market accounts.
Sean Jackson
With inflation rising, one smart way to shield against its impact is with the right savings account. The question is, which one do you choose?
Two of the smarter options are CDs and money market accounts. Each of these solutions offers generous returns, but they're tailored for specific savings purchases.
Money market accounts are akin to a hybrid checking account in that you can make regular purchases using a debit card. Meanwhile, a CD is a smart way to store your cash and let it grow until its maturity date. I'll break down how each one works so you can decide the best fit for you.
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What are certificates of deposit (CDs)?
A certificate of deposit (CD) is a type of savings account that holds a set amount of money for a fixed time period. Term lengths can be six months to five years. The rates on CD accounts are much higher than those found on traditional savings accounts, with many now offering an APY of around 4%.
Savings rates on CD accounts are locked in once you open the account, which is why many experts are suggesting that you take advantage of savings rates while they’re still high. However, when you put your cash in a CD account, you won’t be able to access this money until the account matures, or you’ll risk incurring a fee that can offset any interest earned.
When to open a CD: If you’re saving for a particular goal, like a future purchase, putting your cash in a CD can help. For example, if you plan on purchasing a vehicle in three years, opening a three-year CD can help you maximize your savings until you’re ready to make that purchase, while also helping you resist the temptation to spend that cash.
Before signing up for a CD, here are some things to consider:
- If you need to withdraw cash, it will close the CD and charge you a fee
- CDs won't earn you as much as investments historically can
- For long-term CDs, inflation might negate some of your earnings
What are money market accounts?
A money market account (MMA) is an interest-bearing account at a bank or credit union. MMAs differ from traditional savings accounts as they allow check-writing privileges and sometimes come with a debit card that can be used to access money at an ATM. Plus, they usually have much higher interest rates than traditional savings accounts.
Basically, they can be thought of as a blend of traditional checking and savings accounts. Like high-yield savings accounts, rates on money market accounts are variable, fluctuating with market conditions.
When to open a money market account: Money market accounts are good options for individuals who need to keep their savings easily accessible. Therefore, they're good choices when saving for a short-term goal or putting cash away in an emergency fund. However, make sure you'll be able to meet any minimum balance requirements so you're not stuck with any fees.
These accounts offer high savings rates, but make it easy for you to withdraw cash if needed — at no additional fee. Check-writing privileges and ATM access also make withdrawing funds more convenient than other savings accounts that require you to transfer the money into a checking account first.
Consider these things before opening an MMA:
- Many accounts come with minimum balance requirements
- They have variable interest rates, so if the Federal Reserve cuts rates in the future, it could impact your earnings
- Some banks offer these accounts with transaction limits; pay close attention to the terms before opening
Which savings account works best for you?
Money market accounts and CDs vary in a few key ways. Mainly, money market accounts offer a level of liquidity that CDs don’t. In an MMA, your money is accessible, while in a CD, your cash isn’t accessible until the term account matures.
Another way these accounts differ is that the savings rates on MMAs are variable, meaning they can go up or down depending on the market, which is beneficial if rates go up, but means less earnings if rates go down. On the other hand, since CDs offer a fixed rate, if rates go down, your earnings won’t be affected.
Therefore, take a look at your priorities and cash flow to determine the best fit for your needs.
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