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money market account vs cd

When it comes to saving your money, you have a number of account options. You might first think of a simple savings account that allows your money to grow according to a set interest rate. You also have the options of choosing a money market account or a certificate of deposit (CD). A money market account is like a mix of a savings account and a checking account. A CD on the other hand, doesn’t offer much flexibility in accessing your money with set term and withdrawal limits.

Pros and Cons of Money Market Accounts

Money market accounts (MMAs) are useful money management tools. They are best described as a hybrid of a savings account and a checking account. Money market accounts earn interest much like savings accounts do, i.e. according to the interest rate that applies at a given time. Plus, MMAs typically have more favorable rates than a typical savings account. Then like a checking account, money market accounts often include ATM cards and check-writing abilities. You will want to double check with your bank, though, since not all money market accounts offer these perks.

However, money market accounts don’t have the complete flexibility of checking accounts. MMAs do limit you to six outgoing transactions, like withdrawals and transfers, per statement cycle just like with a savings account.

You may also want to be wary of MMA minimums. Higher minimum deposits and balances can come as a cost of better interest rates. This usually means minimum deposits of $2,500 or higher, with some even reaching $10,000.

Pros and Cons of CDs

money market account vs cd
Certificates of deposit, or CDs for short, are timed deposit accounts. When you open a CD, you choose your term length from the options your bank or credit union give you. These terms usually range from three months to five years. Once you open an account, you have to make a deposit. That deposit will be held for the entire term length, during which you cannot make any withdrawals or additional deposits. This definitely limits how easily and how often you can access that money.

The whole set up of CDs is to lock away your money for a set amount of time while it earns interest. This allows the issuing bank to use your money during that time for other purposes. Then when your CD reaches maturity, you’ll receive your initial deposit back, plus all the interest it earned over the term. So if you were to try to make a withdrawal during your term, which isn’t how CDs are designed, you’ll face a pretty hefty penalty. This usually deducts days or months of interest earned from your withdrawal depending on your CD term length.

CDs can also require high minimum deposits, whether $500 or $10,000. This limits potential customers from opening a CD if they can’t safely set that amount of money aside.

Money Market Accounts vs. CDs: Which Is Better?

Comparing money market accounts and CDs overall isn’t entirely fair since they are structured so differently, so let’s break it down.

Money market accounts are better than CDs if you’re looking for a more accessible account. You can easily deposit and withdraw funds to and from a money market account with an ATM card, personal checks, online or on mobile. Again, also double check whether a bank issues ATM cards or personal checks with their money market accounts. Your main limitation will be the six allowed outgoing transactions per statement cycle.

CDs, on the other hand, are all about limiting access to your money. Once you open an account and make your initial deposit, you cannot move money in or out of the account without facing a heavy penalty. This may help you though, if you’re prone to spending and not saving. If that’s the case, a money market account may give you too much freedom.

When it comes to interest rates, money market accounts may be your better bet. MMA rates are typically higher than basic savings accounts and short-term CD rates. CDs can have higher rates than a money market account, but those are often the long-term accounts from two years and upward. That means that to snag a CD rate that’s higher than a money market account rate, you’ll most likely have to wait a couple years to have access to that money.

Where Can You Find Money Market Accounts and CDs?

money market account vs cd

You can find both money market accounts and CDs at banks and credit unions. Not all banks offer money market accounts. Chase Bank, for example, does not. However, most banks do offer CDs ranging in term lengths and rates.

You’ll find the best interest rates for both types of accounts at online banks like Discover Bank and Ally Bank. These banks don’t have to maintain the costs of brick-and-mortar locations, so they offer some of the highest rates in the industry. They typically also charge lower fees, if at all.

The Takeaway

Both money market accounts and CDs offer useful but different ways to save and access your money. MMAs are good for those who want to keep their money within easy reach, either through an ATM card or a checkbook. You should make sure you can handle that easy access though. On the other hand, CDs offer a great way to set money aside and forget about it for a few months or even years. That way, you can let your money grow undisturbed.

Tips for Saving Your Money 

  • Whether you’re saving for a down payment or just for an emergency fund, it’s always important to have some savings stashed away. This means more than sticking some cash under your mattress, though. Opening a type of savings account keeps your money save and insured. Plus, your money can’t grow on its own under your mattress!
  • Often, it’s easiest just to open a savings account with the bank we already work with. But that bank may not offer a great interest rate to grow your money. It helps to shop around for the best savings accounts and even the best checking accounts to find a bank that you’re comfortable with and that has the highest-earning interest rates.

Photo credit: ©iStock.com/Julia_Sudnitskaya, ©iStock.com/Rawpixel, ©iStock.com/GaudiLab

Lauren Perez, CEPF® Lauren Perez writes on a variety of personal finance topics for SmartAsset, with a special expertise in savings, banking and credit cards. She is a Certified Educator in Personal Finance® (CEPF®) and a member of the Society for Advancing Business Editing and Writing. Lauren has a degree in English from the University of Rochester where she focused on Language, Media and Communications. She is originally from Los Angeles. While prone to the occasional shopping spree, Lauren has been aware of the importance of money management and savings since she was young. Lauren loves being able to make credit card and retirement account recommendations to friends and family based on the hours of research she completes at SmartAsset.
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