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Money market accounts and certificates of deposit (CDs) can both help you grow your money. These interest-earning accounts are alike in some ways, but they have some key differences. Money market accounts offer more access to your money, but CDs tend to earn higher interest. One isn't necessarily better than the other. The right one for you will depend on your financial goals and when you plan on using your money.
What Is a Money Market Account?
A money market account provides easy access to your funds and allows you to earn interest. Most come with a debit card or checkbook. That can make it easy to pay bills or use the account for transactions, whether that's online or in person. You can also add funds at any time.
Money market accounts are offered by banks and credit unions but aren't quite as flexible as checking accounts, which are designed for daily transactions. Some financial institutions may limit you to six electronic withdrawals or transfers per month. There may also be a minimum balance requirement to avoid fees.
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What Is a CD?
A CD is a type of deposit account with a fixed interest rate and set time period. The money you put into a CD earns interest, but it's effectively locked up until the term ends. If you make a withdrawal prior to that, it'll likely trigger a penalty. The fee can vary from one financial institution to the next. In some cases, it could be as high as 12 months' worth of interest. Term lengths generally range anywhere from a few months to five years or more, and you usually can't add funds to a CD.
There are ways to avoid CD penalties, however. A CD barbell, for example, has you put some money in a short-term CD and some in another, longer-term one. This allows you to earn interest without all your money being tied up for too long. Another option is a CD ladder, which involves spreading your money across several CDs that have different term lengths. As each term expires, you'll gradually gain access to more money.
Differences Between CDs and Money Market Accounts
Both CDs and money market accounts are FDIC-insured. If your financial institution fails, you'll be covered up to $250,000 per account holder. But there are some key differences between CDs and money market accounts.
| Money Market Account vs. CD | ||
|---|---|---|
| Money Market Account | CD | |
| Interest rates | Vary, but some money market accounts currently have rates topping 4% | Typically higher than money market accounts; at the time of this writing, some rates topped 5% |
| Liquidity | You can tap your funds whenever you like, though some financial institutions limit account holders to six free electronic transfers and withdrawals per month | You'll likely be penalized for withdrawing funds before the CD term ends; fees vary but may be as high as 12 months' worth of interest |
| Best for | Money you'd like to access easily | Money you don't plan on using in the immediate future |
CDs Tend to Offer Higher Interest Rates
Interest rates on savings accounts, CDs and money market accounts fluctuate. They tend to move in the same direction as the federal funds rate. When this rate increases, you may see annual percentage yields (APYs) on deposit accounts go up as well. That said, CDs typically earn more interest than money market accounts.
Money Market Accounts Provide More Liquidity
You'll likely be penalized for taking money out of a CD before it matures. Penalties can vary, but some financial institutions may charge as much as 12 months' worth of interest. Money market accounts allow for greater liquidity. Withdrawals made at an ATM or physical branch may be unlimited, but there might be a cap on how many free electronic transfers and withdrawals you can make in a given month (a common limit is six).
When Is a Money Market Account the Better Option?
Money market accounts can be a great place to hold your emergency fund or money you're saving for short-term financial goals—like cash you're setting aside for a down payment on a home or your next vacation. Money market accounts let you earn interest and also allow you to withdraw funds relatively easily. Just be on the lookout for potential fees and minimum balance requirements.
When Is a CD the Better Option?
CDs stand out for their competitive interest rates, which are usually higher when compared to money market accounts. That can make sense if you don't mind giving up access to your funds for a prolonged period of time. Another option is to stagger your funds across two or more CDs with varying terms. That allows you to reap the benefits without sacrificing as much liquidity. But if easy access to your money is important to you, a money market account or high-yield savings account could be a better fit.
The Bottom Line
There are some key differences between CDs and money market accounts. Both allow you to earn interest on your savings, but they aren't structured in quite the same way. Money market accounts allow for easier access to your funds, but CDs typically offer higher interest rates. The right one for you depends on your financial goals and investment timeline. It's also possible to have a money market account and CDs at the same time.
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