CDs vs money market accounts: choosing the right savings account

If there’s a silver lining to the inflation cramping all of our budgets, you can finally earn a decent rate of return on your savings.

And it’s not just regular savings. Certificates of deposit and money market accounts are alternatives to traditional savings accounts that can offer even better interest rates with little to no risk of losing value. But how do you decide which will give you the yield and flexibility you need? The answer comes down to how often you need to access your cash.

CDs vs. money market accounts at a glance

CDs and money market accounts both offer competitive interest rates with low risk, but some key differences can make one or the other a better fit for your needs.

With a CD, you generally make a one-time deposit, which sits in the account for a fixed term—typically 3 months to 5 years. You’ll earn a fixed interest rate, and at the end of the term, you get back your initial deposit plus interest.

A money market account functions like a combination of a checking and savings account. You can add and withdraw money as needed, but you may need to keep a higher minimum balance to earn the account’s annual percentage yield. Interest rates on money market accounts tend to be higher than regular checking accounts.

CDs vs. money market accounts

Let’s take a closer look at how CDs and money market accounts work and the pros and cons of each.

How CDs work 

A certificate of deposit (CD) is essentially a loan you make to your bank. You deposit a lump sum and agree to keep it with the bank for a set time, typically between 3 months to 5 years. In exchange, your money earns interest over that period, and at the end of that term, you get back both your initial deposit plus interest. CDs do not lose value, are FDIC insured, and in most cases, you can get a better interest rate by agreeing to a longer term.

Many CDs automatically renew at the end of their terms and “roll over” into a new CD for the same term at the currently available interest rate. However, you typically have a window after your CD matures where you can decide to withdraw the money instead.

You can get your money back before the end of the term, but there will almost always be an early withdrawal penalty assessed. Beyond that, there is no other way to access your money until the CD matures unless you opt for a no-penalty CD.

Most banks offer CDs, while credit unions offer a similar product called share certificates. You can typically find the best deals by shopping around and looking at online banks.

CD pros and cons

While CDs can be a valuable part of your financial plan, they’re not always the right fit. Here are some CD pros and cons to consider.

Pros

• Higher interest rate. CDs typically offer higher interest rates than regular savings accounts.
• Certainty. You know exactly how much money you’ll earn and when you’ll get it.
• Safety. CDs do not lose value.

Cons

• Early withdrawal penalties. You usually can’t access the money in your CD without penalty before the term ends.
• Opportunity cost. If interest rates rise, you may earn less from your CD than you could elsewhere.
• Long-term returns. For long-term investing, you’ll likely get better returns from a diversified portfolio that includes exposure to the stock market.

How money market accounts work

Like CDs, money market accounts are low-risk investments with higher interest rates than regular savings accounts. They also come with some additional flexibility over high-yield savings accounts.

Money market accounts function a lot like checking accounts in that you can deposit money at any time and use a debit card or checks to withdraw or spend that money as needed. They are also FDIC or NCUA insured up to $250,000.

Money market accounts typically have higher minimum balance requirements than checking accounts but offer higher interest rates. And often, the higher your balance, the higher your APY.

One downside is that banks occasionally limit the number of withdrawals you can make each month, so they’re not always ideal for everyday spending.

Money market account pros and cons

In some ways, money market accounts offer the best of both worlds between their  higher-than-average interest rates and easy access to funds.

“Flexibility is one of the biggest pros,” says Brad M. Hindman, CFP®, Managing Director of Investments with Wells Fargo Advisors in Johnstown, PA. “Everyone wants flexibility with their money, to be able to have access to it. But if we get into an environment where rates are going down, you don’t have that rate locked in like with a CD.”

But despite all the features in the “pros” column, there are drawbacks to consider before choosing a money market account.

Pros

• Interest rate. Money market accounts earn more interest than regular savings accounts.
• Accessibility. Debit cards and checks make it easy to access your money as needed.
• Safety. Money market accounts are FDIC or NCUA insured up to $250,000.

Cons

• Minimum balance requirements. You may need to maintain a certain balance to earn that higher interest rate.
• Withdrawal limitations. Your bank may limit the number of withdrawals you can make per month.
• Fees. There may be fees for going below the required minimum balance or exceeding the number of allowed withdrawals.

Money market vs. CD: Which is right for you?

Deciding between a money market account and a CD depends on when you’ll need the money. A money market account may be the right choice if you need more flexibility. If you don’t need the money for a while, a CD may be better.

When a money market account might be a better choice

A money market account might be better than a CD when you want to earn a competitive interest rate but still have easy access to your money.

“Money market accounts are good for emergency funds,” says Michael Berkhahn, CFP® and Vice President with Graham Capital Wealth in Tampa, FL. “You know that if something drastic happens, that money is going to be readily available, and you can get your hands on it, even on a Saturday or Sunday.”

Here are some situations where a money market account could make sense:

• You want access to your money. Money market accounts make accessing and spending your money much easier than CDs.
• You want to continue making contributions. Unlike most CDs, you can make additional deposits to your money market account.
• You have plenty of cash. You’ll need enough cash to comfortably maintain any minimum balance requirements.

When a CD might be a better choice

CDs offer benefits that be better than a money market account when you have a lump sum of money you want to save for a longer-term goal.

“A CD makes sense when you have a defined timeline,” says Hindman. “For example, if you want to buy a house in three years and you’re hard and fast on that goal, getting a rate locked in on that timeframe makes sense.”

Here are some situations where a CD could be the right choice:

• You have a lump sum. You’re looking to make a single investment rather than multiple contributions.
• You have a defined timeline. If you know when you’ll need the money, you can choose a CD with a term that matches your timeline.
• You expect interest rates to decline. Locking in a high, fixed interest rate can guarantee a solid return on investment.

The takeaway 

CDs and money market accounts are both safe ways to earn more interest on your cash.

With a CD, you can get a higher interest rate if you can leave the money untouched for a fixed term. With a money market account, you can get a great interest rate while still maintaining the use of your savings.

Depending on your needs and timeline, either could be a great fit. Consider your goals, shop around for the best rate, and choose the account that works for you.

Frequently asked questions

Why would you want a money market account over a CD?

Money market accounts make it easier to access your money without penalty. You can open one at most banks and credit unions.

Which is safer: a CD or money market account?

CDs and money market accounts are equally safe. They are both insured accounts and will not lose value.

Which account pays more interest: a money market or CD?

The interest rate on money market accounts and CDs primarily depends on the bank or credit union you choose, the amount of money you’re depositing, and the length of time until you need it. To get the best rate, it pays to shop around.

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