The best places to save your money: Money market accounts, savings accounts and CDs

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Saving money is essential if you want financial security and success, but unless you’re earning interest, you’re not making the most of what you sock away. Some people are not sure where to stash their savings for emergencies or a vacation.

Money market accounts, savings accounts and certificate of deposit accounts can give your savings a boost. At federally insured banks and credit unions, these accounts are protected for up to $250,000 per depositor, per insured bank, per ownership category.

Understanding how these interest-bearing deposit accounts work and the differences among them can help you make the best choice.

“When it comes to saving money, there’s no time like the present,” says Mark Hamrick, Bankrate’s senior economic analyst. “Still, one should think about a variety of timelines with respect to savings.

“That includes having emergency savings available, which is necessarily liquid or not locked into a commitment of time as well as long-term savings, which can include, but isn’t limited to, retirement savings. It might be money that’s intended for a goal in the intermediate term, such as a major purchase or event such as travel or education.”

The pandemic and your savings

The COVID-19 pandemic has dealt a harsh blow to the U.S. economy. The Federal Reserve has slashed rates to keep the economic engines running. Low rates hurt savers, but savers should stay focused,  Hamrick says.

“While the pandemic-related downturn has coincided with a return to low interest rates, including on savings rates, one should not become overly focused on the short-term noise of rate movements,” Hamrick cautions. “The cost of failing to save is much greater than what one might sense is a lost opportunity because of the current environment.”

There are still ways to boost your savings power, such as by laddering certificates of deposit.

“One time-tested strategy, such as building a CD ladder, intends to distribute time horizons in order to maximize both flexibility and return over time,” Hamrick  says. “Because CDs do involve a time commitment, this should involve funds which won’t be needed immediately.”

What is a money market account?

A money market account, or money market deposit account, is an interest-bearing savings product available at most banks and credit unions.

It is used to pay more interest than a regular savings account, but the Fed has cut rates to near zero and yields on the two products are not that different now. If you find an MMA with a higher yield, be prepared to maintain a higher minimum balance or maybe hold to other requirements to get the top yield.

To find the best rates, use Bankrate to compare MMAs.

How does a money market account differ from a savings account or CD?

A money market account differs from a savings account or CD in that it’s got checking account features. You can usually write checks from it and may get a debit card.

A money market account is considered a deposit account under the Federal Reserve’s Regulation D, so the number of transactions, such as transfers and withdrawals, are limited to six per month. There are some transactions, including withdrawing from an ATM or bank teller, that don’t count as one of the six transactions. There are also exceptions to the limits. Check with your bank to find out its policy.

Typically, a money market account pays less than a CD because a CD requires you to keep your cash in the account for a set period of time. Some of the top money market accounts earn up to 0.70 APY, according to Bankrate, while some three-year CDs pay more than 1 percent. Money market accounts with higher yields typically require you to maintain a higher balance.

Pros and cons of money market accounts, savings accounts and CDs

In order to compare these products, it’s important to understand their advantages and disadvantages. Here’s what you need to know.

Money market accounts

In general, money market accounts pay a higher APY than ordinary savings accounts. Check to see how your financial institution compounds the interest. You’re likely to see daily compounding, with the interest paid out monthly. Additionally, check to see whether the APYs are tiered. Often, you’ll have a lower APY until you reach a certain balance, then the APY increases. A balance of $100,000 or more, for example, could earn you a higher interest rate than an account with less than $10,000.

Advantages

  • Higher interest: Compared with interest checking accounts and many average savings accounts, you can generally expect a higher rate of interest.
  • Accessible funds: A money market account may come with check-writing privileges, maybe even a debit card, and the ability to make electronic transfers.
  • Safe place for your money: Your account is protected at a federally insured bank or credit union.

Disadvantages

  • Limited withdrawals: Unlike a checking account, which doesn’t limit any types of transactions, money market accounts have restrictions. You can’t write unlimited checks or make unlimited electronic transfers.
  • Account minimums: You’re often required to keep a higher account minimum than with a savings account or even a CD.
  • Monthly fees: If you don’t meet the account minimum, there’s a good chance you’ll be charged a monthly fee.

Savings accounts

Savings accounts with no minimum balance requirement are currently paying in the neighborhood of 0.70 percent APY. Some savings accounts do have minimum balance requirements, but they’re usually lower than a money market account. Like a money market account, though, withdrawals are limited.

Advantages

  • Safe place for your money: Savings accounts are usually FDIC-insured and highly liquid.
  • Low fees and minimums: It’s possible to find high-yield savings accounts that charge no minimums or monthly fees.
  • Access ATMs: You can usually access your savings account via ATMs, making it convenient to get money when you need it.

Disadvantages

  • Much lower interest rates: Your APY on a savings account will probably be lower than what you’d earn on a CD.
  • Withdrawal limits: The number of withdrawals you can make a month are limited.

Certificates of deposit (CDs)

A CD is the most restrictive of these savings accounts. You usually need to commit a minimum amount of money to open a certificate of deposit, and the money is locked away for a period of time, depending on the term you select. CD terms can range from a few months to five years. Compare the best rates on CDs on Bankrate.

If you withdraw the money before the CD “matures,” expect to pay a penalty. Depending on the size of the CD, you can earn a higher APY than you would with a savings account or money market account.

Advantages

  • Interest rate: Not only is the interest rate on a CD often higher than other savings accounts, it is fixed and doesn’t vary over the term, like you see with money market and savings accounts.
  • No fees: As long as you don’t withdraw your money early, you won’t be hit with any fees.
  • Choice of term lengths: You can choose how long you want to keep your savings tied up so it can earn interest. Banks commonly have multiple choices of CD terms.

Disadvantages

  • Low liquidity and access: You can’t withdraw money from a CD at an ATM or by writing checks. The money is not accessible unless you make an early withdrawal.
  • Penalties: Pulling out money before the CD term is up will incur a penalty. Some CDs allow you to withdraw some of the money without penalty, but they typically come with lower APYs and other restrictions.

Comparing account features

Here’s a helpful comparison of account features. You can see the differences between different types of accounts you might see at a bank or credit union.

Checking Savings Money market CD
FDIC/NCUA insurance Yes Yes Yes Yes
Check-writing Yes No Yes No
Debit card Yes Yes Yes No
Liquidity Yes Yes Yes No
Limited transactions No Yes Yes Yes
Relative APY Low Low Low High

Who should get a money market, savings account or CD?

Deciding which type of account to open depends on your goals and your financial situation. If you don’t have a lot of money to start with, a savings account makes sense because it’s possible to find accounts that don’t require minimums.

If you want to earn a higher APY and you can meet a higher account minimum, a money market account is a good choice. It’s a good pick, too, for people who need easy access to their money.

If you know that you won’t need the money for a while, and you want to earn an even higher APY, a CD works well. However, you should commit only the amount of money that you know you won’t need until the CD term ends.

How to use money market, savings and CDs to save for your goals

Each of these accounts can help you save for different types of goals. You can use these accounts together to work toward your goals and maximize your earnings.

  • Short-term goals. A savings account is a good fit for near-term plans, like a vacation. You won’t earn a lot of interest, but if you’re going to need the money soon, that won’t matter much.
  • Medium-range goals. A money market account can be well-suited for medium-term goals because it requires a higher minimum balance and pays a higher yield. In addition, it’s liquid enough that if you need to tap your funds earlier than you planned, there are no penalties to pay.
  • Long-term goals. CDs make sense if you are saving for a goal that is several years off, such as buying a house, especially if you have a big sum of money that you can afford not to touch for a long time. Plus, CDs have a fixed rate, so you need not worry about rate fluctuations.

Risks of using money market accounts, savings accounts and CDs

Although your money is protected from bank failures by FDIC insurance and from credit union failures by NCUA insurance, there are other risks to keep in mind as you consider these savings products:

  • Inflation. The biggest risk you’re likely to have is inflation. As consumer prices increase, your yield may not keep up with inflation. While you won’t lose your principal, you could see an erosion of your purchasing power over time.
  • Rate fluctuations. Some accounts are more sensitive to the macroeconomic environment. Yields on savings, money market accounts and CDs are based on interest rate decisions of the Federal Reserve. When rates fall, so does your yield.

With a CD, you have some protection from rate volatility because you lock in the rate for the term length of the CD. But if the CD matures during a low-rate environment and you renew the CD, you’re stuck with a lower yield than you had before.

Offset the inflation risk by having other investments, such as stocks and bonds.

How to choose the right account for you

Ultimately, choosing the right account to grow your savings depends on your situation and your cash and income needs. Take a look at where you stand right now. In many cases, it makes sense to start with a savings account. You can avoid balance minimums and fees and build your balance.

Over time, you might add a CD or two. When your savings and/or money market account grows enough that earning such a low yield isn’t serving you any longer, it’s time to branch out.

In the end, it’s about what you want to accomplish with your money, and how to use these accounts in combination to help you reach your goals.

“It is possible that this era of low rates will persist,” notes Hamrick, “but that doesn’t change the fact that we should always shop around for the best rates on the products we’re investigating, such as a basic savings account, money market account, high-yield savings or certificate of deposit.

“It is all about maximizing the opportunities of the present so that we have a better financial future. That, in fact, is timeless.”