Money Market Account vs. Certificate of Deposits (CD).
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Banks offer several options to keep your money safe while earning interest. If you seek the safest options, consider money market accounts and Certificate of Deposits. They have a few common features while several distinguishing features which make them unique. Which one should you choose?
In this guide, we explain how a money market account works and how a CD works. We take you through the differences and help you choose the one that fits your needs.
In this article
What is a money market account?
A money market account (MMA) is a type of financial account offered by banks and credit unions that combines features of both a savings account and a checking account. It is designed to provide a higher interest rate than a regular savings account while still allowing some limited access to the funds.
Related: Money Market Accounts for Kids
- 3.50% APY
- $1,000 minimum to open
- No account opening or maintenance fees
How does a money market account work?
A money market account (MMA) allows individuals to deposit their funds into a specialized account offered by a bank or credit union. Once your account is open, you can deposit funds into the money market account. You can transfer money from your checking account, savings account, or other sources into the MMA.
Money market accounts generally offer higher interest rates than regular savings accounts. The interest is typically calculated on a daily or monthly basis and is added to your account balance. The accounts usually restrict the number of withdrawals or transfers you can make in a given period, typically per month. Exceeding the allowed number of transactions may result in fees or a downgrading of the account to a regular savings account. Many money market accounts have minimum balance requirements to avoid monthly maintenance fees or to qualify for the advertised interest rate. If your account balance falls below the specified minimum, you may incur fees or receive a lower interest rate.
Related: Best Money Market Accounts of 2023
What is a certificate of deposit?
A certificate of deposit (CD) is a financial product offered by banks and credit unions that allows individuals to deposit their money for a fixed period of time, typically ranging from a few months to several years. It is considered a time deposit because the funds are locked in for the agreed-upon term, and withdrawing them before the maturity date may result in penalties.
How does a Certificate of Deposit work?
To open a CD, you choose a financial institution and select the term (duration) of the deposit. Common CD terms range from three months to five years, although some institutions offer terms outside this range. This amount is known as the principal. The minimum deposit required for a CD varies depending on the financial institution and the specific CD product. CDs offer a fixed interest rate for the entire duration of the term. The interest rate is determined at the time of account opening and is generally higher than the interest rates offered by regular savings or money market accounts. The interest rate remains unchanged throughout the term, regardless of any changes in market conditions.
The maturity date is the end of the CD term when the funds, including the initial deposit and accrued interest, become available for withdrawal. The maturity date is known upfront and is specified when opening the CD. Withdrawing funds from a CD before the maturity date typically incurs penalties, generally calculated as a percentage of the interest earned or a certain number of months' interest.
Money market accounts vs certificate of deposit
MMAs and CDs are both financial products banks and credit unions offer, but they have some key differences. Here's a comparison of money market accounts and certificates of deposit:
Liquidity
Money market accounts provide greater liquidity compared to CDs. MMAs usually allow for limited check writing and some form of ATM access, making it easier to access your funds when needed. On the other hand, CDs have fixed terms, and withdrawing funds before the maturity date can result in penalties.
Interest rates
CDs generally offer higher interest rates than money market accounts. CDs often have fixed interest rates that remain constant throughout the term, while MMAs have variable rates that can fluctuate based on market conditions.
Term
Money market accounts do not have a fixed term; they are ongoing accounts you can maintain for as long as you want. CDs, however, have specific terms you choose when opening the account, ranging from a few months to several years. The longer the CD term, the higher the interest rate typically offered.
Minimum deposit and balance requirements
Both MMAs and CDs may have minimum deposit requirements to open the account. However, CDs often have higher minimum deposit requirements compared to MMAs. Additionally, some banks may require a minimum balance to maintain in an MMA to avoid fees, while CDs typically do not have ongoing balance requirements.
Related: No penalty Certificate of Deposits
Flexibility
Money market accounts offer more flexibility in terms of adding or withdrawing funds. You can deposit and withdraw money from an MMA as needed, subject to any transaction limits or requirements imposed by the institution. CDs, once opened, generally do not allow additional deposits. You can only access the funds upon maturity or by incurring penalties for early withdrawal.
Our CDs are perfect for growing your money at a guaranteed rate.
- 4.50% APY 3-Month Fixed Rate CD
- 4.00% APY 12-Month Fixed Rate CD
- 3.60% APY 24-Month Fixed Rate CD
Pros and cons of money market accounts
Pros
- High Interest Rates. Money market accounts generally offer higher interest rates compared to regular savings accounts.
- Liquidity. Money market accounts offer high liquidity as compared to CDs.
- FDIC Insurance. Money market accounts offered by banks are generally insured by the Federal Deposit Insurance Corporation (FDIC).
- Stability. Money market accounts are considered relatively stable and low-risk investments.
Cons
- Higher Minimum Balance Requirements. Money market accounts often have minimum balance requirements that you need to maintain to avoid fees or qualify for the advertised interest rate.
- Limited Transactions. Money market accounts typically impose limits on the number of transactions you can make in a given period. Exceeding the allowed number of withdrawals may result in fees.
- Potential for Inflation Risk. Money market accounts may not always keep up with inflation rates. If the interest rates offered on MMAs do not match or exceed the inflation rate, the purchasing power of your funds may decrease over time.
Pros and cons of certificate of deposit
Pros
- Predictable interest income. CDs generally offer higher interest rates compared to regular savings accounts and money market accounts. The fixed interest rate remains constant throughout the CD term, allowing you to earn a predictable return on your investment.
- Safety and Security. CDs are considered low-risk investments.
Cons
- Limited Liquidity. CDs are designed to be held until maturity. Withdrawing funds before the maturity date may result in penalties, such as forfeiting a portion of the interest earned or paying a penalty fee.
- Opportunity Cost. By committing your funds to a CD, you may miss out on potential higher returns from other investment opportunities. If market interest rates rise significantly during your CD term, you may be locked into a lower interest rate, missing the chance to earn more elsewhere.
- Inflation Risk. CDs may not always keep pace with inflation. If the interest rates offered on CDs do not exceed the inflation rate, the purchasing power of your funds may erode over time.
- Minimum Deposit Requirements. Some CDs may have minimum deposit requirements that need to be met to open an account.
Best money market accounts
Synchrony Bank
With Synchrony Bank’s money market account, you earn an APY of 2.25%, and it has no minimum balance requirement. There is no minimum deposit to get started, and you can withdraw cash from their in-network ATM for free. The bank will reimburse up to $5 for domestic use if you use non-network ATMs. You can easily access the account through online and mobile banking.
Read a full review on Synchrony Bank.
Discover Bank
A well-known name in the financial industry, Discover offers a money market account with an APY of 4.05%, for balances lower than $100,000 and 4.10% for balances $100,000 and over. There are no monthly maintenance fees; you can access over 60,000 ATMs for free.
Related: Best High-Yield Savings Accounts
Best CDs
Ally Bank
Ally Bank’s CD is a great choice, with an APY starting at 2.50% for three months to 5.0% for 18 months. There is no minimum deposit to open a CD. ATM withdrawals from in-network ATMs are free, but Ally will reimburse up to $10 in a statement cycle for non-network ATM fees.
Read a full review on Ally Bank.
CIT Bank
With CIT Bank CD, you get an APY of 5.00% for a 6-month tenure, and it has a minimum deposit requirement of $1,000. The APY is 4.60% for an 18-month CD and 4.65% for a 13-month CD. There are no maintenance fees, and you can easily manage your account online using its mobile app. Besides CDs, CIT Bank offers a complete banking solution with loans, savings, and checking accounts.
FAQs
What is the difference between a high-yield savings account and a money market account?
The money market account as well as a high-yield savings account will earn interest on the money but you can access your funds easily in a money market account. Since it comes with debit cards, checks or ATM cards, it is easy to make withdrawals as and when you need to.
Do Certificate of Deposits have a fixed or variable interest rate?
CDs have a fixed interest rate for the term. The rate remains fixed at the time of CD opening and the rates vary based on the term you choose.
Is money market account safer than a Certificate of Deposit?
While money market accounts and CDs are both safe and offer a steady stream of income, a money market account is more liquid as compared to a CD. If you withdraw the CD before maturity, you will have to pay a penalty.
- 3.50% APY
- $1,000 minimum to open
- No account opening or maintenance fees
The bottom line
Irrespective of your choice, it is important to consider your financial goals and the APY offered on each account. If you are concerned about earning interest on your money, you need to opt for the one with the highest APY, but if you need high liquidity, you might want to consider a money market account. Compare all the available options and then make a decision. If you like, you can also open both accounts, saving for your emergency fund in a certificate of deposit and saving for a downpayment in the money market account.
Related: Best Money Market Accounts
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