Money Market vs CDs: What's Best for You?

Investing money for your future is incredible important and two of the most popular options are money market accounts and CDs. Find out which is best for you: money market accounts vs CDs.

We all want to save money. Between bills, credit cards and the cost of life’s unexpected happenings, it can be hard to save up. That’s when we turn to savings accounts to help. Counting on interest isn’t enough, sometimes, but with banks vying for customers, there’s now a whole slew of new banking options that can help you get a leg up on savings. 

Getting to know the options available to you means learning what a money market and certificate of deposit account has to offer, and how they’re both different from a savings account.

Money Market

A money market is similar to that of a savings account, but trends toward higher interest rates in comparison. These accounts are offered by banks as an option to help you save with its higher rate of interest. With a money market account, you can write checks directly from the account, make ATM withdrawals and enact electronic transfers.

In keeping aligned with that of a traditional savings account, a money market may have a limited number of withdrawals per month, making them less accessible than a checking account. You might also be faced with a higher minimum deposit amount than a checking account.

Certificate of Deposit (CDs)

Like money market accounts, CDs allow for higher interest rates than a traditional savings account. You’ll also notice that with a CD, the interest rate will remain consistent throughout the term of the account. There are no fees with CDs when you hold the account to maturity.

The main difference that sets CDs apart from a savings account is that you must meet a minimum amount and you aren’t permitted to make a withdrawal from the account for a specified amount of time. An example: a three-year CD can be purchased for a $1,000 minimum deposit that yields 1.9% Annual Percentage Yield (APY).  The CD, in three years, will be worth $1,058, and at this time, is considered to be “mature”.

Sometimes, CDs will have higher interest rates than a savings account and a money market account.  The catch?  You can be penalized for making a withdrawal before its maturity.  Once the CD has reached maturity, you have two options: withdraw the money or place the money in another CD.

Savings Account

A savings account is the standard method of savings people use by means of a bank.  It earns interest, although not as much as your other options, the CD or money market account. With a savings account, you may be restricted in the number of withdrawals, depending on your bank and its stipulations. The interest rate can move up or down over time, and are typically low—between 1-2%. The Federal Reserve sets these interest rates. 

For some savings accounts, you can opt to have a debit card that will allow you to draw money using an ATM or electronic transfer. However, you’ll have to read the fine print on your savings account to see if there’s a minimum balance requirement, or you could be charged a monthly fee if the balance dips below.

Which One to Choose?

A savings account, a money market or a CD - which one is best for you? There’s no cut-and-dry answer. It depends on the result you’re after and how you plan on using your money while it’s neatly stowed away, gaining interest. A couple scenarios to consider are:

You Aren’t Concerned About Getting the Best Interest Rate Out There, but Want to Earn a Little Interest While Still Being Able to Access That Money 

If this sounds like you, the casual saver, than a traditional savings account is probably for the best. Savings accounts don’t have the most competitive interest rates, but you won’t be penalized for accessing and making withdrawals nearly as much as opposed to a money market or a CD account. With a traditional savings account, you can whisk your money away and have it gain a bit of interest. Then you can pull it out when you need it most, all while avoiding fees. 

The key thing to remember with savings accounts is to read the fees associated with ATM usage, electronic transfers, minimum balances and withdrawals. As long as you follow all of the stipulations associated with your bank’s savings accounts, you can skirt the fees and enjoy the interest as it incurs.

You Have a Decent Savings That You’d Like to Accumulate a High Level of Interest on, But You Still Want Access to This Money Without Being Penalized

The answer: money market. Larger amounts of money that can be stashed in a money market can enjoy a competitive interest rate, all while being open for withdrawals. A money market account allows users access via ATM transactions, checks or electronic transfers - just like a regular savings account.

Unlike a savings account, there are likely more fees associated with a money market that somewhat forces you to keep money in the account as opposed to making numerous withdrawals. Money markets tend to have a minimum balance requirement, which is something to keep in mind if you want to access and pull out that money. There can also be a limit to the number of withdrawals per month. The penalty in dipping below the minimum balance or over shooting the number of withdrawals is the costly fees. The fees could negate the interest your earning in the money market entirely.

You’re Aiming to Acquire Interest on a Sum of Money and Are Willing to Forfeit Easy Access in Exchange for a High Interest Rate

Does this sound like your financial situation? You have a chunk of change that you want to grow with a competitive interest rate, and you really aren’t planning on touching it. If you’re thinking of accessing this money in a CD account, you should know ahead of time that there are high fees for withdrawing early before it reaches its predetermined maturity level. For some, a CD offers the maximum amount of interest but without the risk of investing in stock or bond markets. 

A CD account is best for those willing to stash away their money for the set amount of time. Another bit of helpful information to know before signing onto a CD is that banks typically require a minimum balance of $500 or $1,000 in order to open one. You also won’t be able to write checks with a CD account or have a debit card to withdraw, as these accounts aren’t designed for easy access. CDs have terms of spanning from about 3 months to 5 years. If you can wait the term length to access your money, then this method of saving can benefit you.

What’s Best for You?

You aren’t limited to one way to save.  Many people can enjoy a savings account with a money market on the side, or a CD account that safely grows their money with high interest. All three are quite popular methods of saving, and for most financially sound people, they have more than one of these accounts under their belt.

To decide what’s best for you, you must ask yourself if you want access to the money you’re saving. This will determine what type of account is right for you: a savings account, a money market or CDs.