There is no question that having money saved for the future or in case of an emergency can provide peace of mind. But you don’t want a big chunk of cash just sitting around in your checking account.
So if you have funds you’d like to put away for safekeeping—and want to earn some interest while you’re at it—it might be worth looking into using a money market account (MMA) or a certificate of deposit (CD). But which one should you choose?
Both money market accounts and certificates of deposit are types of savings vehicles (available through financial institutions) that typically offer a higher rate of interest than regular savings accounts. They are also secure, as they are insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration.
How Are They Different?
The main difference between them is accessibility.
With an MMA, you can deposit and withdraw funds as needed. But with CDs, you need to park your cash in an account for a specific period of time. For example, if you have a CD for one year, you won’t be able to access the funds in the account until it “matures”—that is, until the one-year term is up. If you do? Expect penalties.
Another key difference between them is the interest rates you’ll receive.
“With money market accounts, interest rates are typically tied to balance—so higher balances in an account will yield higher interest rates,” says Jason Noble, a certified financial planner at Prime Capital Investment Advisors. “With CDs, interest rates are tied to time, so you’ll usually get higher rates for longer-term holding periods.”
In MMAs, the interest is also variable, Noble says. “If rates move down, you’ll get a lower rate; if rates go up, you’ll get a better rate. But in CDs, your rate is locked in at the time you buy the CD.”
Money market accounts (sometimes referred to as money market savings accounts or money market deposit accounts—while money market mutual funds are a different animal altogether) are an ideal fit if you think you’ll need to use your money sooner rather than later.
“People should choose money markets if they know they’ll need those funds within a short period of time—less than three months, for example—or if they are setting aside money for an emergency,” says Brian Dudley, a certified financial planner at Wealth Enhancement Group.
Here are additional benefits and considerations:
- Earn high interest on deposits
- Full access to funds, unlike some other higher-rate savings options
- Can be used as a payment instrument, like for writing checks or getting funds via an ATM
- May require a minimum balance—for example, at least $2,500 to avoid incurring a monthly maintenance fee
- Fluctuating interest rates that may not be as high as those you receive with a CD
Money market accounts offer savers accessibility at the expense of a higher rate. If you don’t need the accessibility—because you’re saving for a goal in the next few years, for example—a CD may be the better option.
“If you know you won’t be using the money anytime soon, say, a year, then you should opt for a 12-month CD and get that higher interest rate,” says Dudley.
Just remember that the money you put in a CD is basically untouchable until the end of the term.
- Earn high interest on deposits
- Typically has a fixed rate that doesn’t change
- Generally has a higher rate than money market accounts
- Comes with a fixed duration (up to 10 years) when your money is inaccessible
- Potential fees or penalties if you access funds before maturity
- May have a minimum deposit requirement (most require at least $500 to $1,000 to open)
When to Stick with a Regular Savings Account
If MMAs and CDs don’t feel like the right fit for you, you can always just open a regular savings account. However, make sure you choose a high-yield savings account and compare rates.
Also, there are no rules against using all three types of accounts for different goals. For example, a high-yield savings account for an emergency fund, a CD for your future child’s education and an MMA for a vacation in the next few months.
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Melanie Lockert is a freelance writer and author of the blog and book Dear Debt, in which she chronicles her journey out of $81,000 in student loan debt. Her work has appeared in Business Insider, VICE and Allure, among other publications.