Money market account vs. CD: Which is better for your savings?

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You want to grow your sayings, but the low interest rates that come with traditional savings accounts aren’t that enticing. And investing it in the stock market can be too risky.

This is where certificates of deposit (CDs) and money market accounts come into play. Both offer a low-risk way to earn a solid return on your money with minimal effort on your part.

However, these accounts work in different ways.

Before you decide where to put your money, it's essential to understand the key differences between money market accounts and CDs. That way, you can figure out which one is better for you.

How money market accounts work

A money market account is a type of savings account that offers consumers the best of both worlds. You can earn a higher-than-average APY on your money. And you'll typically get check-writing privileges and a debit card to make purchases and ATM withdrawals.

That said, these accounts come with some limitations. Many banks require a minimum balance to earn the highest possible APY or avoid monthly maintenance fees. There may also be limits on the monthly transfers and withdrawals you can make.

Pros and cons of money market accounts

How CDs work

A certificate of deposit (CD) also offers a competitive APY on your money. But there's a catch. You must leave your funds in an account for a set term period. Once the CD term ends, you can access the funds and use them however you see fit. Or you can roll them into another CD.

Unlike MMAs or high-yield savings accounts, you may have to pay a penalty fee if you withdraw your money before the term ends.

There are three common types of CDs to choose from:

• Traditional CD: You’ll earn a fixed APY for the CD term. Terms range from three months to five years.
• No-penalty CD: With this CD, you can withdraw your funds before the term is up without paying a penalty. No-penalty CDs typically offer lower APYs than traditional CDs in exchange for the added flexibility.
• Bump-up CD: If you think interest rates will increase, a bump-up CD lets you capitalize by requesting a rate increase while the CD is open. Again, you’ll likely get a lower APY than a traditional CD initially. Still, the earning potential could make this option well worth it.

Pros and cons of CDs

Money market account vs. CD: Which one should you pick?

Deciding between a money market account and a CD comes down to your financial situation and goals.

“When you open a CD, you generally agree to leave your money invested in that asset for the full maturation period, which is typically a year or more,” says Jake Hill, CEO of DebtHammer. “Those who need easier, on-demand access to their money should choose a money market account instead.”

Here’s a closer look at some of the key differences between the two accounts:

• Liquidity: Funds in an MMA are accessible at any time, aside from limitations on transfers and withdrawals. But if you want to pull funds from a CD, you’ll pay a fee unless you opt for a no-penalty CD.
• Interest rates: Both options come with competitive APYs. However, interest rates on MMAs are variable, so they fluctuate with market conditions. CDs come with fixed interest rates that guarantee a specific return.
• Account minimums: CDs require a minimum opening deposit; you cannot add to it once the account is open. MMAs may also have a minimum initial deposit, and you’ll likely need to maintain a certain balance to avoid fees.
• Flexibility: The only flexibility you’ll get with a traditional CD is choosing your term. On the other hand, MMAs are very flexible. Many come with checks and debit cards to give you increased access to your money.

Paying attention to market trends before opening an account is equally important.

“Evaluate the current interest rate environment and consider whether you believe rates will rise or fall in the future,” says Douglas Goldstein, certified financial planner at Portfolio Resources International Group.

If you think interest rates will fall in the future, it may make sense to lock in a CD now to guarantee that higher rate. But if rates keep rising or stay the same, an MMA may make more sense.

When you should choose a CD

For the most part, a CD is a good idea if you: 

• Want to earn a sizable return on your money.
• Have a specific long-term savings goal with a set timeframe.
• Have a large amount of cash you’d like to deposit at once.
• Want a predictable way to grow your savings.
• Anticipate a drop in interest rates due to market conditions.
• Already have an emergency fund and won't need access to the cash.

When you should choose a money market account

On the other hand, consider a money market account if you: 

• Want easy access to your money
• Have a short-term savings goal
• Are building your emergency fund
• Want to avoid costly penalties for early withdrawals
• Want the ability to write checks or deposit cash
• Anticipate interest rates will rise in the future

The bottom line

When picking the best savings account for you, consider your timeline, liquidity needs, and goals to make the best decision.

“Money market accounts are often sensible for individuals who prioritize liquidity and easy access to their funds, such as those saving for a down payment on a house or an upcoming vacation,” Goldstein says. “CDs may be more suitable for individuals with a longer-term savings goal, like funding a child's education or planning for retirement.”

Editorial disclaimer: Opinions expressed are author's alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.