CDs vs money market accounts: choosing the right savings account for you (2024)

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 three months to five 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 those for regular checking accounts.

CDs vs. money market accounts

CDsMoney market accounts
Interest ratesFixedVariable
Access to fundsLikely with penaltyFlexible
Minimum depositVaries by CDHigher minimums
Debit card accessNoYes
Check writing privilegesNoYes

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 three months to five 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 and 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 when 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. “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 time frame 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.

CDs vs money market accounts: choosing the right savings account for you (2024)

FAQs

CDs vs money market accounts: choosing the right savings account for you? ›

Money market accounts offer flexibility with check-writing and debit cards, savings accounts are more accessible and have lower fees, and CDs offer higher interest rates but with a commitment to keep your money locked away for a set period of time. To make the best choice, consider your financial goals and situation.

Which is better, CDs or money market account? ›

CDs typically offer higher interest rates compared to regular savings or money market accounts. Generally, the longer a CD's term, the more interest it pays, helping offset the loss of liquidity.

What is the main difference between a money market account and a savings account? ›

A money market account is also a deposit account that offers higher interest compared to a traditional savings account, but it also includes some capabilities more commonly found in traditional checking accounts, such as access to your funds via debit card or check.

How do regular savings accounts money market accounts and CDs compare? ›

MMAs and CDs both offer higher interest rates than traditional savings accounts on average, but the best savings account rates are competitive. MMAs typically have higher initial deposit and monthly balance requirements than savings accounts. CDs require that you leave your money untouched for a fixed amount of time.

How do I choose between savings and money market accounts? ›

Accessibility. The biggest difference you'll find between a money market account vs. a savings account is the access you have to your money. A money market account (MMA) gives you the freedom and flexibility of writing checks and making withdrawals straight from your account.

Why would you choose a CD over a money market account? ›

CDs generally offer higher interest rates compared with money market accounts. Money market accounts provide access to funds and offer interest rates similar to regular savings accounts. CDs earn more interest over time but have restricted access to funds until maturity.

Why might you select a money market account over a CD? ›

Money market accounts offer flexibility with check-writing and debit cards, savings accounts are more accessible and have lower fees, and CDs offer higher interest rates but with a commitment to keep your money locked away for a set period of time.

What is the downside of a money market account? ›

Indirectly losing money, however, is a downside of money market accounts. Indirect loss can occur if the interest rates tied to the account fall, thus diminishing the initial return value of your account.

Should I use a money market account as a savings account? ›

If the saver is able to meet the minimum balance, doesn't anticipate needing the funds anytime soon, and is interested in a higher interest rate, a money market account is the better choice.

What are the risks of a money market account? ›

The biggest risk a money market account poses is that your money may lose value over time to inflation. Depending on inflation and the interest rate you earn with your money market account, inflation may outpace your MMA's earnings.

What does Dave Ramsey say about CDs? ›

Ramsey has referred to certificates of deposit as "nothing more than glorified savings accounts with slightly higher interest rates." Ramsey warned that you shouldn't invest in CDs because average rates won't keep pace with inflation and because they aren't a good place to grow your money.

Are CDs safe if the market crashes? ›

Market Crashes and CDs

Even if the market crashes, your CD is still safe. Your interest rate won't change, and your money is still insured. But, keep an eye on interest rates. After your CD term ends, you might find that new CDs have lower rates if the economy is still struggling.

What bank has the best money market account? ›

Best Money Market Account Rates
  • Quontic Bank Money Market Account. 4.9. APY 5.00% Minimum Opening Deposit $100 Monthly Fee $0. ...
  • EverBank Yield Pledge Money Market Account. 4.8. ...
  • Vio Bank Cornerstone Money Market Savings Account. 4.7. ...
  • Zynlo Bank Money Market Account. 4.6. ...
  • Sallie Mae Bank Money Market Account. 4.6.
3 days ago

Is a money market account a good choice? ›

Because you earn higher interest rates than with a traditional savings account, a money market account can be a great choice to set aside some emergency cash or start building your savings. And unlike a traditional savings account, you have more options for withdrawing your money when you want it.

When to use a money market account? ›

It might be worth investing in a money market account when you want a safe place to store your money with a higher interest rate than a checking account, while still having some liquidity features such as check writing. It's ideal for emergency funds or short-term savings goals.

What is one disadvantage of a money market account as compared to a regular savings account? ›

Limited transactions

Some accounts limit certain transfers and withdrawals (known as convenient transactions) to six per month, so this isn't the best account for regular banking.

How much does a $10,000 CD make in a year? ›

The national average APY for a one-year CD is 1.74 percent, based on Bankrate research, which shows this average has increased or remained the same since March 2022. If you deposited $10,000 into a one-year CD that pays this national average rate of 1.74 percent, in one year it would be worth a total of around $10,174.

What is a disadvantage of money market deposit accounts? ›

Disadvantages of money market accounts
  • Limited transactions. Some accounts limit certain transfers and withdrawals (known as convenient transactions) to six per month, so this isn't the best account for regular banking. ...
  • Deposit and balance requirements. ...
  • Fees. ...
  • High interest rates. ...
  • Flexible access. ...
  • Federal insurance.
May 14, 2024

Does money market or CD earn more interest? ›

You want to earn the highest APY possible: CD

CDs typically have higher APYs than other accounts, including money market accounts. You can earn significantly higher APYs and grow your money faster.

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