Money Market vs. CD: Which Should You Use?
Written by
Virginia Anderson
Edited by
Melanie Grafil
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Right now, it isn’t hard to find CD and money market offerings with a 3.00% APY or higher. If both account types can earn you a decent return, what other factors should you consider when deciding between a money market vs. a CD for reaching your financial goals?
Money Market vs. CD: Factors To Consider
You may already know the basics of a money market account and a CD.
Money market accounts are variable interest-bearing deposit accounts that blend some characteristics of checking and savings accounts. You can make unlimited deposits, and many money market accounts come with check-writing privileges and a debit card that you can use for point-of-sale transactions or to withdraw money from ATMs.
If you deposit your cash in an FDIC-insured money market account, the FDIC insures your funds up to $250,000, meaning you’ll be covered if the bank fails. The same protection is available through the NCUA at NCUA-insured credit unions.
This all sounds pretty good so far, so what is the downside to money market accounts? Some have monthly withdrawal limits and high minimum balance requirements, and they often have a lower interest rate than a savings account or CD. You may also find that your bank limits the number of transactions you can make from your money market account each month.
A certificate of deposit, or CD, is a savings vehicle in which you make one initial deposit, and your money earns a fixed interest rate for a set term. Traditional CDs often earn a higher APY than money market accounts. Like money market accounts, you’ll receive up to $250,000 in FDIC protection, assuming you deposit your money at an FDIC-insured financial institution. The downside with CDs is that they don’t allow additional deposits and early withdrawal usually comes with a penalty — your money is locked in.
Liquidity
Both money markets and CDs are relatively liquid options. However, neither offers total liquidity. Both account types can penalize you for accessing your money more often than allowed per your account terms.
Money market accounts are more liquid than CDs since they allow monthly access, whereas CDs are inaccessible — if you want to avoid the early withdrawal fee — until the end of the term, which could be as long as 10 years.
Penalties and Fees
With CDs, you’ll usually incur a penalty for cashing out before the CD matures. Depending on the financial institution, money market accounts may charge transaction fees for excessive withdrawals or a monthly service charge if you don’t maintain minimum account requirements.
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Volatility
Money market accounts and CDs are both safe instruments for cash holdings. Neither is impacted by security market fluctuations, and both carry NCUA or FDIC insurance up to $250,000, assuming you deposit your money in an FDIC or NCUA-insured financial institution.
Can a Money Market Account Lose Money?
Yes, you can indirectly lose money with a money market account through fees if you don’t maintain minimum account requirements or if you make excessive withdrawals. However, you won’t lose money in the same way that investments can lose money, through market volatility.
Since a money market account allows you to earn interest on the balance you hold and isn’t tied to equities such as stocks or bonds, you don’t need to worry about investment losses. Instead, you’ll receive a periodic interest return deposited into your account. The interest amount you receive varies depending on your balance and the interest terms set by your bank.
You will lose money if you don’t pay attention to the terms of your account agreement. Refrain from going over the transaction limits imposed by your bank, and keep the minimum balance stipulated to avoid unnecessary fees that can wipe out your interest earnings.
Can a CD Lose Money?
You can lose a portion of your CD principal if you withdraw funds before the CD maturity date and haven’t yet accrued enough interest to cover the penalty. Like with a money market account, though, you won’t lose money unless you end up paying fees.
CDs aren’t tied to investments such as stocks and bonds, so there is no risk of losses to the balance of your CD account. The FDIC or NCUA also insures your funds if you open the account at an insured institution, so you won’t need to worry about losing your CD in a bank failure as long as the value of your account is less than $250,000.
The key to making the most of your CD account is avoiding early withdrawals and allowing the money to sit until the CD term expires. That way, you reap the full benefits of the CD without risking excess fees or penalties.
When To Use a Money Market Account
There are a few situations in which it’s advantageous to place your funds in a money market account instead of a CD.
You’ll Be Making Regular Deposits or Withdrawals
While you probably can’t use your money market account for everyday transactions without incurring a penalty, you can make occasional deposits or withdrawals throughout each statement period. The number of transactions you can make will vary according to your bank’s terms. So, if you’re looking for an account that allows you to make a few deposits or withdrawals every month, a money market account might be the right option.
You Want Immediate Access to Your Funds
Many financial institutions that offer money markets will provide you with checks and a debit card tied to your account. Those features aren’t available with CDs. If you decide you need to withdraw money from your money market at 3 a.m. on a Saturday night, you can do so from any open ATM nearby. You won’t have to wait for your local branch to open or try to make an onerous online transfer. Similarly, you can use your money market checks to pay expenses you don’t want to cover via your regular checking account.
You Want To Build Your Emergency Savings
A money market account is an efficient way to build your emergency savings. It usually offers higher interest rates than a traditional savings account, and your funds remain readily accessible. You can use the savings in your account for any emergency that arises, like an unexpected car repair bill. It’s also available for future major purchases, such as an annual family vacation.
What is better than a money market account?
CDs often offer higher APYs than money market accounts, and if you open one at an FDIC or NCUA-insured financial institution, you’ll benefit from up to $250,000 of insurance protection. However, unlike money market accounts, you may incur fees or penalties if you withdraw your money from the CD before its term expires.
When To Use a CD
A CD is appropriate for individuals who want a longer-term savings option and don’t mind letting their cash sit for the length of the CD term. Here’s when to use a CD.
You Want a Higher Interest Rate on Your Money
Money market accounts typically have lower interest rates than CDs. While the offerings vary from one financial institution to another, chances are you’ll find that a CD offers greater earning potential than a money market.
You’re Looking for a Low-Risk Savings Option
Unlike investing in stocks, bonds, mutual funds and other investment products, you receive a guaranteed interest rate on the money you deposit in a CD. Whether you’re risk-averse or working on a balanced portfolio across different investment vehicles, there are few safer options that offer the earning assurance of a CD.
You Prefer Predictable Earnings
CDs are great options for people who have a specific savings goal within the next two to five years. Ideally, you won’t need the money before the CD term expires, and you can use your interest earnings to meet your objective — whether that’s making a down payment on a house or your teenager’s future college tuition.
Final Take
Whether a money market vs. CD is better depends on your savings goals. If you won’t need to access your money for the short term, a CD may allow you to earn more. However, a money market account may be better if you’re unsure when and how often you’ll need access to your funds.
Whichever type of account you choose, be sure to carefully compare the rates, terms and requirements of offerings from different banks to find an account that best meets your savings needs and will earn you a good interest rate.
FAQ
- What is better than a money market account?
- CDs often offer higher APYs than money market accounts, and if you open one at an FDIC or NCUA-insured financial institution, you'll benefit from up to $250,000 of insurance protection. However, unlike money market accounts, you may incur fees or penalties if you withdraw your money from the CD before its term expires.
- What pays more than a money market account?
- CDs usually pay a higher APY than money market accounts. You can also consider a high-yield savings account, which may offer greater interest rates on your balance with fewer withdrawal restrictions than CDs provide.
- What is the downside of a money market account?
- One downside of money market accounts is their lower interest rates, especially compared to CDs. Some financial institutions will charge fees and penalties if you don't maintain a specific balance or exceed their transaction limitations during a statement period.
Andrea Norris contributed to the reporting for this article.
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