Money Market vs. CD: Which Is Right for You?

Money market vs. CD

Here’s a side-by-side CD vs. MMA comparison:

*Average interest rates are provided by the FDIC and are accurate as of July 2024.

What is a money market account?

A money market account (MMA) is a type of savings account that’s designed to earn interest and provide fast, free access to your funds. The interest rates are typically higher on a money market account vs. a savings account but are usually lower than a high-yield savings account. MMAs usually come with a debit card and/or check-writing privileges.

MMAs are a great way to earn interest on money that you might need to use in the near or distant future. Similarly to a high-yield savings account, an MMA can also be a good place to build an emergency fund. You can also use it to hold money you’re saving for a short-term goal, such as an international trip or the down payment on a new car.

How do money market accounts work?

Money market accounts work like a hybrid checking/savings account. First, you open the account with a deposit. Some banks have minimum requirements for the initial deposit; it may be $1,000 or more in deposits. The money will begin earning interest, usually at a variable rate.

After your account is up and running, the bank will send you a debit card or provide the opportunity to order checks.

At that point, you can withdraw money by:

• Transferring it to another bank
• Making a purchase with a check or debit card
• Withdrawing money from an ATM

You can make additional deposits at any time, usually via a transfer from an external bank account. If the account is administered through a traditional bank, it may be possible to also make in-person deposits.

There are two primary kinds of MMAs, traditional and high-yield. Traditional money market accounts currently have a national average interest rate of 0.66%, but many banks offer higher rates. High-yield MMAs on the other hand have APYs of well over 5%.

Some examples of high-yield money market accounts include:

• Ponce Bank money market account: 5.26% APY
• America First Credit Union money market account: 5.24% APY
• First Mid Bank & Trust money market account: 5.18% APY
• Lemmata Savings Bank money market account: 5.03% APY

What is a CD?

A certificate of deposit is a savings product that holds a lump sum of money for a predetermined period of time called a term. The money in a CD earns interest at a fixed rate, ensuring predictable interest earnings. Common terms range from six-month CDs to five-year CDs, but some banks offer longer or shorter options to suit a range of customers.

CDs have higher APYs than MMAs, so they’re usually used to maximize interest earnings on money you don’t need to access right away. You could open a CD to store a large sum you’ve designated for a specific use in the future, such as a wedding or a down payment on a home.

How do CDs work?

Traditional CDs are pretty straightforward. Once you open an account, all you need to do is deposit money and let the account sit until the term is finished. There’s no need to make additional deposits.

As soon as your funds land in the CD account, they begin earning interest. This rate stays the same for the life of the account, so you can predict exactly how much you’ll earn.

The national average rate for CDs is 0.23% for a one-month CD, 1.53% for a three month CD and 1.86% for a 12-month CD. There are much better rates available, especially with online banks. Some of the best rates sit around the 5% CD rate mark at 5.34%, but may rise above a 6% CD rate for longer terms.

Need to withdraw money from a CD before the end of the term? It’s possible, but you’ll pay a steep penalty for doing so. The penalty varies by bank and CD term but usually ranges from 90 to 180 days of interest.

When the CD term is up, you have two main options. You can either take the money out of the account or let it renew.

You can choose from a variety of CD types, including:

• Traditional CDs. A traditional CD has a fixed APY and a specific term; you’ll pay a fee for an early withdrawal.
• High-yield CDs. This type of CD has a higher APY than a standard CD. It’s one way to increase your earnings.
• Jumbo CDs. A jumbo CD has a higher-than-usual minimum deposit — often between $25,000 and $100,000 — but doesn’t always offer a better APY.
• No-penalty CDs. With this type of CD, you can withdraw money before the end of the term without incurring a penalty. They often have lower APYs.
• IRA CDs. This type of account invests the money in your individual retirement account (IRA) into a CD.
• Add on CDs. An add-on CD doesn’t restrict you to a single deposit; you can continue to deposit funds. You’ll still get a fixed rate, but it might not be as high as a traditional CD.
• Bump-up CDs. A bump-up CD allows you to increase the APY one or more times before the term ends.
• Brokered CD. A brokered CD is like a traditional CD, but you open it with a brokerage firm rather than a bank. This option allows you to choose from a wide range of CDs and sell your account before it matures.

Pros and cons: money market account vs. CD

Before you choose a CD or money market account, take time to examine the pros and cons of each:

When is a money market account a better choice?

Here’s when you should consider a money market account instead of a CD:

• You may need fast access to the cash. Is there a chance that you might need to make a withdrawal from your savings? A money market account is the better option; you can take out money without paying fees or penalties.
• You want to make multiple deposits. With an MMA, you can typically make as many deposits as you like. It’s a convenient option if you’re building up a fund for a vacation or another large purchase down the road.
• You need a safe way to earn interest. Money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC), as are business money market accounts. This means your funds are protected up to the maximum. Plus, the APY is usually higher than a standard checking account.

When is a CD a better choice?

Here’s when a CD is better than a money market account:

• You have a lump sum to save. Already have cash on hand? With a CD, you can benefit from depositing the entire amount at once — no additional contributions are required.
• You want easy maintenance. A CD is a “set it and forget it” kind of savings account. Once the initial deposit is complete, you don’t need to do anything else until the account matures.
• You want a guaranteed return. A key difference between money market and CD accounts is that the CD has a fixed APY. In other words, you never need to worry about the rate changing during the term.

How to open a money market account or CD

Before you open an account, explore your options to find the CD or MMA with the highest rates. Online banks, which have less overhead than traditional institutions, are usually the most competitive.

Once you choose a product, here’s what to expect from the process:

1. Provide personal information. The bank will likely request your address, Social Security number and contact details. Depending on the situation, you might need to provide photo identification, such as a passport or driver’s license.
2. Connect a bank account. Your opening deposit will come from this account, so choose accordingly.
3. Transfer funds. Initiate a transfer from the connected bank account. For MMAs, make sure you reach the minimum deposit (if applicable). For CDs, remember to deposit the full amount right away; most products don’t allow additional deposits.

Money market vs. CD: Which is right for you?

If you have a lump sum of money that you won’t need to use for a number of months or years, a CD is the better option. It can offer the highest APY compared to money market accounts, which means you can earn more interest while the money is in savings.

However, if you’re building savings incrementally or saving for a short-term goal, a money market account is usually the better option. You can make regular deposits over time — and if you need to take out money for an emergency, the bank won’t penalize you.

If opting for a money market account, make sure to look into the minimum opening deposit, and check to see if the account requires you to maintain a specific balance to get the highest available rate.

How to find the best money market account

To find the best money market account, keep these tips in mind:

• Compare APY options to find the highest available option.
• Make sure the account offers withdrawal options that meet your preferences (debit card, checks or transfers).
• Check the ATM network and out-of-network fees.
• Verify that the bank does not limit deposits and withdrawals.
• Ensure the account is FDIC-insured.
• Examine the minimum deposit and balance to make sure it suits your finances.

How to find the best CD

Use these strategies to find the best CD for your needs:

• Choose a term that you can manage easily.
• Look for your desired features, such as rate bumps or no-penalty withdrawals.
• Shop around to find the highest APY for your chosen term length.
• Read about early withdrawal penalties.
• Ensure the account is FDIC-insured.
• Examine your options when the account reaches maturity.