Money Market vs. CD: Understanding the Difference

Relatively low risk and FDIC-insured, money market accounts and CDs both offer unique advantages. They generally outyield typical savings accounts. However, money market accounts offer easier access to cash than CDs with comparable rates.

If your cash is lying around, whether in your checking account or under the couch cushions, then either kind of savings product could be a smarter path. We examine the pros and cons of each account to help you decide which is right for you.

What are the advantages of a CD?

A CD is a type of time deposit account that pays you back interest on a set schedule, which can last from one month to 20 years.

CDs have the important upside of frequently providing higher interest rates than other types of savings accounts, including money market accounts. Those rates generally increase the longer the term and the larger the deposit is.

Interest rates for CDs are also usually predetermined, so you know exactly how much you’ll be making without worrying about the effects of volatility in the market and overall interest rates.

What are the disadvantages of a CD?

CDs also have a key drawback: By putting your cash in one, you agree to being locked into a set term before you can access those funds. You’ll incur serious penalties, usually equal to several months of interest, for withdrawing your money early.

While you know what to expect from them, the features of CDs can also be limiting. Those who want more liquidity from their savings so that they feel fine pulling from an account at a moment’s notice may want to consider other options.

Additionally, because many CDs have a fixed interest rate, you could lose out on potential gains if the market revs up while your money is locked up.

What are the advantages of a money market account?

Money market accounts (also known as MMAs) are a category of savings accounts that require higher minimum balances, but as a result, they also deliver greater returns via higher APYs (or annualized percentage yields).

Still, you don’t need a fortune to start at an MMA. However, interest rates do grow along with the amount of money you’re willing to put into your account, with minimum thresholds determining how much you’ll get back.

Interest rates for MMAs are variable with the market, which can be good or bad depending on where rates currently stand. Banks also sometimes offer higher rates on MMAs if you already have a checking account with them. Additionally, a linked checking account may offer other perks, such as waived maintenance fees and easier transfer of funds.

Unlike with CDs, MMAs offer easy access to cash. You can make withdrawals without incurring the early withdrawal fees associated with CDs. However, you are typically limited to six withdrawals per month.

What are the disadvantages of a money market account?

While a variable interest rate can be attractive when the market looks good, it can also mean a dip in interest rates during slower times. Money market accounts don’t provide the same stability of rates that you get from a CD.

CDs also tend to have higher rates than money market accounts, as long as you’re willing to spend the time to let them grow, since MMAs come with considerably more liquidity. You also won’t get the full yield of your MMA unless you are able to meet the minimum balance requirements to earn higher interest rates.

Plus, MMAs are bundled with higher monthly fees than the standard savings account, such as maintenance fees, along with fees for excessive withdrawals beyond the set limit, which is typically six withdrawals per month.

Money market account vs. CD: Which should you choose?

The decision between a money market account and a CD doesn’t have to be an either/or choice. Money market accounts are more flexible and reward larger balances, but your interest rate is also subject to the highs and lows of the market. CDs work for those who are willing to keep their money locked up until the end of the term to nail down rates.

But if you have cash to scatter around for different purposes, you may be served by seeking out both options. You could put more immediate funds in an MMA, so long as you meet minimums to reap the benefits, while placing longer-term investments you don’t plan on touching right away in a CD.

Then again, if you’re just looking to stock away money that you want to retrieve whenever you’d like, a money market account could be ideal. By the same token, CDs are great for those who want their savings to work a little harder and don’t need the funds rapidly. The final answer, as with all financial decisions, can only be determined by your own goals.

Money market account vs. CD: Which earns the most interest?

The conventional view is that CDs offer higher yields on savings than money market accounts, which is true for the most part. But there are caveats: CDs are attuned to those who are willing to put in time, with results dependent on how long you are willing to let your cash accumulate interest. If you’re thinking of withdrawing your money from your CD within a few months to a year, you may get little to no benefit when compared to market rates.

Money market accounts, on the other hand, are not contingent on a set term, but still offer rates that are higher than other more basic savings account options. The interest is compounded daily, so the more money you have in your account, the more you will earn.

Who offers the best rate will vary based on the bank or other financial institution you’re looking at and what’s available in your local market.

Money market account vs. CD: Which is safer?

Money market accounts and CDs are both insured by the Federal Deposit Insurance Corporation (FDIC), which makes them equally safe. When made available by banks, these products are insured for up to at least $250,000 per institution. This means that if a bank were to declare bankruptcy, you would be reimbursed by the federal government for up to $250,000 across all of your FDIC-insured deposits at that bank.

The exact meaning of safety also depends on your circumstances, though. While both types of accounts are secure, CDs come with penalties for early withdrawal. So if you fall into an emergency situation where you suddenly need that extra money, the utility of a CD could be wiped away.

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