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Money Market Accounts vs. Certificates of Deposit (CDs) – Differences

When you’re thinking about starting to save, your first instinct is likely to open a savings account. If you’ve ever Googled anything about saving money, over and over again you’ll see high-yield savings accounts at online banks as the go-to option. 

That’s just one of many savings vehicles available, though. Money market accounts and Certificates of Deposit (CDs) are two other common options worth considering. 

Both tend to offer high returns, but the best option for you depends largely on how you’d like to access your money. Read on to learn about the pros and cons of each and how to decide which is right for your savings goals. 

Money Market Accounts vs. Certificates of Deposit (CDs) – What’s the Difference?

Money market accounts and CDs both have the same objective: to save money easily. The way they go about doing this is entirely different, however. 

Money Market Account

A money market account is like a hybrid savings and checking account. You’ll earn interest as you would on a savings account, but you’ll often get a debit card and the ability to write checks. 

However, unlike checking accounts, MMAs typically have limited spending capabilities. Most limit you to six MMA transactions per month, though it’s increasingly rare for financial institutions to charge excess transaction fees. 

Pros of Money Market Accounts

There are many reasons you’d consider opening a money market account. A few of those reasons include:

  • Higher Earning Capacity. MMAs have a history of offering a higher interest rate than traditional and online savings accounts.
  • You Can Use It as a Limited Spending Account. Money markets allow you to use your account similarly to a checking account. This means you can access your savings as needed, making this option ideal for short-term savings goals. 
  • They’re Very Low Risk. MMAs are insured by the FDIC for up to $250,000. That makes them a safe savings choice in comparison to high-risk options like real estate or stocks. 

Cons of Money Market Accounts

Money market accounts won’t be the best option for certain bankers. Consider the following cons before opening an account:

  • They Often Have Minimum Deposit and Minimum Balance Requirements. Many companies that offer MMAs require a minimum deposit or minimum balance. Luckily, a $100 minimum is pretty common, which isn’t terrible. 
  • Limited Access to Funds. While you can access your money with an MMA, you won’t have unlimited access as you do with a checking account. Instead, you’ll typically be limited to six transactions each month.  
  • You’re Likely to Face Fees. Not all MMAs come with fees, but some do come with monthly maintenance costs just like certain savings and checking accounts. Additionally, you’ll face fines if you make more transactions than your account allows.  
  • The Highest Interest Rates Usually Come With Requirements. While there are MMAs that offer very high interest rates, there’s usually a catch associated with it. For example, many MMAs require a high balance in order to earn the top rate. 

Certificate of Deposit (CD)

A CD or a certificate of deposit is a savings vehicle that you take out for a specific period of time. As long as you don’t touch the money before the end of the term, you’re guaranteed a specific interest rate. This rate is often higher than your traditional savings account. 

Pros of CDs

CDs have long been used as a savings tool because they essentially force you to save money while you earn interest above what you’d get from a savings account.  

  • They’re a Safe Investment Option. Like money market accounts, CDs are FDIC insured so they’re relatively safe investment options. 
  • You’ll Earn a Better Interest Rate Than Many MMAs and Regular Savings Accounts. The rate you get depends on the interest rate set by the federal reserve as well as the amount of time you take the CD out for. The longer you own it, the better your interest rate typically will be. Many of these rates far surpass savings accounts and MMAs
  • There are Very Few Fees. Since you’re using MMA accounts more regularly, you may be charged a monthly fee in order to do so. CDs, on the other hand, don’t come with monthly fees since your money is just sitting and growing. 
  • You Can Make a CD Ladder. If you want the interest rates that come with CDs, but you think you’ll need access to your cash more frequently, CD laddering could be the right strategy for you. You invest in multiple CDs, all of which have different maturity dates. This way, you can still earn interest while also having access to cash as your CDs mature. 

Cons of CDs

CDs have a lot of positives, but they won’t be right for everyone. Here are a few cons to consider:

  • You Often Can’t Access Your Money Until the End of the CD Term. Unless you want to pay fees, you won’t be able to access the money in your CD until it reaches its maturity date. So, if you have a 60-month CD, you won’t have access to that money for the full 60 months. That said, no-penalty CDs are becoming more popular all the time.
  • You May Face an Early Withdrawal Penalty For Taking Out Money Early. Most major banks charge early withdrawal penalties calculated as a set number of days of interest — often between 30 and 150 days, but sometimes longer. How much exactly will depend on the length of your CD. 
  • Inflation is Likely to Outpace Your CD Interest Rate. Historically, most CDs haven’t been able to keep pace with inflation. There are other investment options that do provide a higher return and outpace inflation. 

The Verdict: Should You Open a Money Market Account or CD?

Ideally, you’d open both accounts and use them for different savings purposes. However, if you’re looking to choose just one, you’ll need to consider a variety of factors before making a decision. 

Think about how you need to use the account, what fees you’re willing to pay, and how much you have to contribute to the account on a regular basis. 

You Should Open a Money Market Account If…

A money market account is a better fit if:

  • You Have Small-Term Savings Goals. MMAs are a better option for short-term savings, since you’ll want to use your money market funds more often than a traditional savings account allows. Consider using an MMA for sinking funds you use for miscellaneous spending, that way you can access the money when you need it. 
  • You Want a Debit Card. Money markets have a key perk that savings accounts don’t: they offer an ATM card so you can spend from your account. If this is a key feature you’re looking for, a money market account may be the right option for you.
  • You Want a Higher Interest Rate. One of the reasons people choose a money market account is the interest it offers. Some of the better MMAs such as TIAA and Sallie Mae have higher rates than credit union savings accounts and checking accounts.

You Should Open a CD If…

A certificate of deposit is a better fit if:

  • Your Biggest Focus is Locking in a High Rate. When CD rates are at their highest, this is the perfect time to get the highest rate possible. If your main goal is to find the best rate and you don’t need the money for a long period of time, a long-term CD is a good option. 
  • You Want to Avoid the Temptation of Using Your Money. You may have to pay penalties if you withdraw your money early from your CDs, so it’s a really good incentive to not spend that money. Just be 100% sure you’re not going to need it. 
  • You Want to Give a Financial Gift. Family members may gift children or grandchildren with CDs that fully mature when they’re older. Again, since it’s best not to spend the money in the middle of the CD’s term, gifting a CD can be an easy way to take advantage of high interest rates. 

Final Word

Money market accounts and CDs both provide a way to save for future financial goals. Both tend to have decent interest rates, but the type of account that’s best for you comes down to how often you need to access your money. 

CDs offer higher interest, but you often can’t touch your money for the length of the term. On the other hand, MMA accounts operate like a combined savings and checking account, allowing you limited access to your money. Opening both for different types of savings goals can help you take advantage of the benefits of each, but the decision is entirely up to you!

Christopher Murray is a professional personal finance and sustainability writer who enjoys writing about everything from budgeting to unique investing options like SRI and cryptocurrency. He also focuses on how sustainability is the best savings tool around. You can find his work on sites like Bankrate, Money Crashers, FinanceBuzz, Investor Junkie, and Time.