Trying to decide between a money market account (MMA) and a certificate of deposit (CD)? The account that is right for you will depend on your financial goals and how accessible you want your money to be. While you can often earn a higher interest rate with a CD, your money is locked in the account for a set amount of time. Any early withdrawals can result in penalty fees.
How Does a Money Market Account Work?
A money market account is a type of savings account that offers features similar to a checking account, including the ability to withdraw money using checks or a debit card. You can open an MMA at most banks and credit unions.
The interest rate offered by an MMA is typically variable, meaning it can fluctuate over time. Some MMAs offer a tiered APY. They are structured to offer a higher APY as you save more money in your account.
With an MMA, your withdrawals and transfers are limited to six per month when using debit, check, or e-transfer. However, if you go into your bank or visit an ATM, these withdrawals or transfers won’t count towards the six transactions. As of April 2020, in response to COVID-19, these restrictions were temporarily paused according to Regulation D. However, banks can still decide if they want to enforce these limits, and many do.
You can feel safe saving your money in an MMA, as accounts held at a bank are insured for up to $250,000 by Federal Deposit Insurance Corporation (FDIC), and credit union accounts are insured by the National Credit Union Administration (NCUA).
How does a CD work?
A certificate of deposit (CD), also called a “time deposit” is a special type of savings vehicle available at banks and credit unions. A CD requires that a minimum amount of money is locked in for a specified period. The initial deposit amount will vary by bank or credit union. How long your money is locked up depends on the CD term you choose but typically ranges from six months to five years. In general, the longer the term, the higher the interest rate.
A short-term CD is typically any CD with a term under one year. The benefit of a short-term CD is flexibility. You don’t have to wait multiple years to access your money. A long-term CD has a term of one year or more.
At the end of the term, when the CD matures, you get access to your initial savings plus whatever you’ve earned in interest. If you withdraw your money before the end of the term, you’ll usually pay a penalty fee. Minimum penalties on early withdrawals are set by federal law; however, there is no maximum penalty.
Like money market accounts, most CDs are insured by the FDIC and the NCUA for up to $250,000 per depositor.
When to Choose a Money Market
There are two main reasons to choose a money market account over a CD or regular savings account: if you are interested in faster access to funds and short-term savings.
Convenient Access to Funds
Unlike a CD, a money market typically allows you to write checks or use a debit card to make withdrawals or transfers (though not all banks and credit unions do). This can make it easier to access your funds when you need them. Because your funds aren’t locked in with an MMA, you also don’t have to worry about early withdrawal penalties.
If you are saving for a short-term goal like a vacation or buying a car, a money market account usually offers a higher interest rate than a regular savings account. An MMA can help you to grow your savings faster while also providing convenient access.
When to Choose a CD
You may want to consider a CD over an MMA or regular saving account if:
You Want the Highest Interest Rate
If you’re comfortable locking your money away in a long-term CD, you can typically secure a higher interest rate than with an MMA or regular savings account.
You Want to Avoid Temptation
Many people have a hard time not dipping into their savings when they are readily available. Locking your money into a CD can help to avoid the temptation of spending your savings.
When to Stick With a Savings Account
When trying to decide if you should save your money in an MMA, CD, or regular savings account, you can start by thinking about how accessible you want your money to be. If maximum accessibility is important, you may want to stick with a savings account. A savings account makes it easy to transfer your money to a checking account to complete a transfer or withdrawal. While some MMAs do offer checks and a debit card, not all of them do.
A CD offers the least amount of accessibility because your money is locked in for the entire term. If you are in a situation where you need your money, you will be charged an early withdrawal fee.
Money Market vs CD
Whether a money market account or CD is right for you will depend on your individual needs. If you want the freedom to make withdraws and deposits, then a money market account is probably a better fit. If you don’t need immediate access to your money and you’re interested in maximizing your interest rate, you might consider a CD. If you’re really struggling to make a decision between the two, you can always opt to include both an MMA and a CD in your overall savings plan.