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

It’s important to build a financial strategy that incorporates savings goals. And while traditional savings accounts are an option, they aren’t the only way to build up your funds. Money market accounts and certificates of deposit, or CDs, are other options that may help you earn more money through higher interest rates.

When you compare money markets and CDs, one option may stand out as a better fit for you. Your choice will likely depend on your specific needs, like access to your money or check-writing capabilities. And like any financial decision you make, it’s important to understand the positives and negatives of each type of deposit account.

Let’s look at some of the pros and cons of money market accounts vs. CDs.

• What are money market accounts and how do they work?
• What are CDs and how do they work?
• Money markets vs. CDs

What are money market accounts and how do they work?

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.

Pros of money market accounts

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. At the end of July 2019, the national average interest rate for money market accounts was 0.18% for deposits less than $100,000 and 0.29% for deposits of $100,000 or more, according to the Federal Deposit Insurance Corporation.

A money market account is generally considered a low-risk savings option and can be insured by the FDIC if it’s at a bank. The National Credit Union Administration insures money market accounts at credit unions. When insured, the FDIC and NCUA cover money market accounts up to $250,000.

Let’s recap the pros of money market accounts.

• 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 of money market accounts

While money market accounts offer similar features to a checking account, those features are limited. For example, you can only withdraw money or make payments up to six times a month via check, debit card, draft or electronic transfer. But if you have more than six monthly transactions to make, know that making withdrawals at an ATM or payments on the phone doesn’t count against that limit.

Unpredictability can be another drawback. The interest rate on a money market account can fluctuate, while a regular savings account typically has a fixed rate you can depend on. Though with money market accounts that are tiered, you could earn more interest as your balance gets higher.

Money market accounts may also require you to maintain a minimum balance that may seem high. If your balance falls below the minimum, you could face account fees or other consequences on top of potentially earning less due to a lower balance if the account is tiered.

Let’s recap the cons of money market accounts.

• 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

Common question: Are money market accounts related to money market mutual funds?

While the name is similar, money market accounts are different from money market mutual funds, which are investment options offered by investment companies. Because money market mutual funds are not insured by the FDIC or NCUA, there’s a greater risk you could lose money.

What are CDs and how do they work?

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.

Pros of CDs

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. For example, CDs for less than $100,000 earn on average 0.39% for a six-month term, 0.56% for a 12-month term, 0.86% for a 36-month term and 1.10% for a 60-month term, according to the most recent national data available from the FDIC.

Certificates of deposit also typically have fixed interest rates, so you know at the outset how much interest your investment will earn by the maturity date. There are exceptions, though. If you get a variable-rate CD, the interest rate can change according to rules the issuing bank or credit union will set and explain.

And like both a money market account and a savings account, a CD is generally considered a low-risk savings option because it’s insured by the FDIC or the NCUA for up to $250,000.

Let’s recap the pros of CDs.

• 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 of CDs

CDs typically have a minimum amount that you’re required to deposit. The amount can vary widely, but it’s common to see minimums in the thousands, and they can venture into tens of thousands. And the higher-interest-rate CDs may require a higher minimum deposit amount.

Once you put your money into a CD, you probably won’t be able to withdraw it without penalty before the maturity date. That penalty may vary depending on the financial organization’s rules, including how long the money was held in the account. Make sure to learn the details of the early-withdrawal penalty in the terms and account agreement, keeping future needs in mind.

And take note: Some institutions offering high-yield CDs may not be completely honest. FINRA — the Financial Industry Regulatory Authority — has warned investors to be wary due to reports of organizations advertising high-yield CDs as bait to get people in the door.

These promos might get you to show up in person and then a representative might try to get you to invest a sizable amount of money ($25,000 or more) into an annuity that’s not insured and which is much riskier, according to a FINRA alert.

If you’re unsure about any financial opportunity, you can use BrokerCheck to help verify if the person and firm are registered with FINRA.

Let’s recap the cons of CDs.

• Minimums: Minimum deposit requirements
• Limitations: No access to your money while it’s in the CD
• Penalties: Costs for early withdrawals

Money markets vs. CDs

Money market accounts and CDs are both savings vehicles that can put your money to work for you, earning more interest than a traditional savings or checking account. Though a CD will likely have a higher interest rate than a money market account. To check and compare the most-recent interest rate data published by the FDIC for savings accounts, money market accounts, CDs and more, visit the FDIC online.

When looking at data, keep in mind that while CDs may earn more, you’ll be sacrificing flexibility, because the money will be required to stay in the account for a specific term or else you can face penalties for early withdrawal. With money market accounts, you can expect a lower interest rate, but you’ll gain regular access to your money and the ability to do things like write a few checks each month.

Bottom line

So when it comes to money market accounts vs. CDs, which is better? That’s all up to how you want your money to work for you.

It’s important to understand the pros and cons of money market accounts and CDs so that you can choose the savings vehicle that best meets your savings goals. For some people, the flexibility of a money market account wins hands-down. For others, the higher interest rates of CDs are a top priority.

There’s no one right or wrong answer for which type of savings vehicle is better. And your overall savings plan can include both a money market account and CDs. The important thing is to take as much advantage of savings opportunities as you can so that your money can grow and work harder for you.