CDs vs. money market accounts: Which is best for you?

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When you’re building your savings, it is important to choose the best account for your situation. You want an account with a competitive interest rate that will grow your savings, but also one that will give you the right amount of accessibility to your money if you need it.

Money market accounts and certificates of deposit (CDs) each provide a boost to your savings by offering competitive rates. However, CDs and money market accounts differ in terms of the liquidity available to you while your money is deposited. That is why it’s important to understand the differences between the two types of savings vehicles before making a choice. Let’s take a closer look.

How money market accounts work

A money market account is a safe place to stash your money at federally insured financial institutions. These accounts can pay you competitive interest rates that can boost your overall savings. Money market accounts typically pay variable interest rates, which means the rate can rise and fall depending on market conditions. In general, these funds are accessible and make it relatively easy for you to tap your savings a few times each month.

There are generally limits to the number of times you can move money out of this type of account on a monthly basis. Typically, it’s six monthly withdrawals. So, you’ll still have the option to use these funds several times each month and potentially more as the rules have relaxed in the midst of the coronavirus pandemic. Contact your bank directly to confirm its withdrawal and transfer rules.

A money market account can come with a debit card and/or a box of checks. With those tools, as well as the ability to transfer money deposited in your money market account to different accounts you hold at your bank, you can access your money whenever the need arises.

Overall, a money market account can give you a boost to your savings. Plus, you’ll be able to spend the funds whenever you need to.

How CDs work

A certificate of deposit, or CD, is another type of federally insured savings account that you can find at banks and credit unions. CDs pay a fixed interest rate. Longer-term CDs, such as 5-year CDs, tend to pay higher rates than shorter-term CDs, like 6-month CDs and 1-year CDs. But unlike a money market account, you will not have access to your funds for a specific period of time. The bank or credit union tend to pay higher interest rates because you have agreed to lock up your money for a specific period of time, typically ranging from three months to five years.

In most cases, the CD will offer a guaranteed rate of return for the funds you place in the account. If you open a long-term CD, expect to receive a higher yield. If you open a short-term CD, then you’ll likely receive a lower interest rate.

No matter what term you choose, you’ll know exactly how much interest you’ll earn over the length of the CD when you sign up.

When money market accounts are a better fit

A money market account is a good way to grow your savings, but it is not the best fit for everyone. Here’s when it might make sense:

You want easy access to your funds

A money market account will allow you to spend or access the funds a few times each month or statement period. Although there are some monthly transaction limits (six withdrawals is often the max), you’ll be able to work within those guidelines to cover any emergency expenses.

If you’re considering stashing your emergency fund in one of these accounts, then the money market account is a better option than a CD because you can get at your money penalty-free if you need it.

You want these funds to grow

Money market accounts can have competitive interest rates. A higher APY can go a long way as you work to build your savings. A money market account, for example, can provide you with a better return than a traditional savings account.

If you have a short-term savings goal, then this extra boost is helpful — and you’ll still have access to your funds. For example, saving for an upcoming vacation in a money market account could be a good choice. The reason?  You’ll be able to grow your savings more quickly without risking any of your principal, and you’ll also have the ability to pull the cash out when you’re ready to jet off on your adventure.

When CDs are a better fit

CDs can be a better fit in some cases. Here’s when it might be a good option for you:

You have a long-term plan for these funds

When you open a CD, you are choosing to lock your funds away for a specified period of time. Depending on the term you choose, it might range from a few months to several years. If you have a specific plan for these funds — and won’t need to tap the funds in an emergency —  then a CD might be a great fit.

For example, if you have plans to buy a house in five years, then a CD could be the right place to store your down payment. You would be able to take advantage of the most competitive interest rates and have access to the funds when you are ready to purchase your home. Plus, you won’t have to worry about losing money like you would if you invested in stocks or other types of non-guaranteed investments if the market tanks.

You want these savings locked away

Saving money can be difficult. If you struggle to keep from spending your savings account, then a CD could be a good choice. You won’t be able to touch the funds for the entire term, unless you’re willing to pay an early withdrawal penalty. That should keep your savings protected from a last-minute sale at your favorite store. Plus, your savings will be growing through the term.

Where can you get a money market account or CD?

CDs and money market accounts are both popular account types. You can find them at many  banks or credit unions. One of the first places that you should check is with your current financial institution. Keeping all your accounts in one place can make managing your financial life easier.

If you’re looking for the highest possible rate, take the time to shop around and compare offers from multiple places. Your best bet is to check with online banks as they tend to offer better rates than their brick and mortar competition.

When to stick with a savings account

The benefit of money market accounts is that they let you store your cash but maintain the flexibility of a checking account. However, they often have higher minimum balance requirements than regular savings accounts.

A savings account is usually just as good as a money market account: It lets you save money and earn a competitive rate. Even if you do run into an emergency, you can usually get your money out of a savings account quickly by making a withdrawal or transferring it to a checking account just as you could with a money market account. With a savings account, you just won’t have  checkbook access offered.

Bottom line

Whether you choose to open a money market account or a CD, it’s important to shop around for the best rate. It is a good idea to put your money to work in one of these low-risk options if you can’t risk losing any money. But make sure to consider your goals before moving forward with either savings choice.

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Written by
Sarah Sharkey
Contributing writer
Sarah Sharkey is a contributing writer for Bankrate. Sarah writes about a range of subjects, including banking, savings tips, homebuying, homeownership and personal finance.