CDs vs. Money Market Accounts

Certificates of deposit and money market accounts both offer competitive returns on cash deposits with minimal risk to your investments. Money market accounts are better suited for people who are working up to a savings goal, while CDs might benefit those who are holding onto funds for a future purchase.

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APA Schell, J. (2022, April 21). CDs vs. Money Market Accounts. Annuity.org. Retrieved May 29, 2022, from https://www.annuity.org/personal-finance/banking/certificate-of-deposit/cds-vs-money-market/

MLA Schell, Jennifer. "CDs vs. Money Market Accounts." Annuity.org, 21 Apr 2022, https://www.annuity.org/personal-finance/banking/certificate-of-deposit/cds-vs-money-market/.

Chicago Schell, Jennifer. "CDs vs. Money Market Accounts." Annuity.org. Last modified April 21, 2022. https://www.annuity.org/personal-finance/banking/certificate-of-deposit/cds-vs-money-market/.

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Banks offer financial products like certificates of deposit (CDs) and money market accounts for people seeking to grow their savings while offsetting the effects of inflation. Both products can be great options if you have significant cash savings and want a risk-free way to earn interest on your deposits.

Money market accounts are similar to traditional savings accounts, but they generally offer higher interest rates in exchange for greater restrictions (like higher minimum balance requirements or limitations on the number of allowable withdrawals).

When you purchase a CD, on the other hand, you’re agreeing to keep a portion of your money with a bank for a set period — usually between three months and five years. In exchange, you’ll earn interest based on how much you deposit and how long of a term the CD carries.

Knowing which of these products can help you best maximize your savings can have a big impact on your personal finance strategy. You can evaluate the similarities and differences between money market accounts and CDs to better understand each option.

How Are CDs and Money Market Accounts Similar?

CDs and money market accounts are both secure, stable ways to help your savings grow over time. Because these accounts typically offer higher interest rates than traditional savings accounts, they’re also better at reducing the devaluation effects brought by inflation.

These products also come with more restrictions than are placed on traditional savings accounts. In exchange for the higher APY, both CDs and money market accounts tend to require a minimum deposit amount when opened. Further, money market accounts typically require you to maintain a higher minimum balance than required by savings accounts.

Both products are considered risk-free ways to earn interest on your money. CDs and money market accounts are fully insured by the FDIC for up to $250,000 per depositor per financial institution.

It’s important to understand that, since the $250,000 FDIC limit includes all accounts held by one depositor, money market accounts and CDs are not separately insured when held at the same institution. In other words, if you hold both a CD and a money market account at the same bank, your money in both accounts is insured for up to $250,00 total — not for up to $500,000.

What Are the Major Differences Between CDs and Money Market Accounts?

Because they’re designed for different purposes, CDs and money market accounts have some key differences seen in the rules for using them. CDs are the less flexible option but can earn you better returns on your deposit over time. Money market accounts, on the other hand, give you greater control over your funds but may not meet the same savings rates as CDs.

Typical Rules of CDs vs. Money Market Accounts
Key FeatureCDsMoney Market Accounts
Additional DepositsYou cannot add money to your initial deposit.You can deposit funds into the account at any time.
WithdrawalsYou cannot withdraw money before the maturity date without paying a penalty.You cannot withdraw money before the maturity date without paying a penalty. You can withdraw money from the account at any time.
Interest RatesA higher than average fixed interest rate is locked in when the CD is purchased.The interest rate varies based on the amount of money in the account. Higher balances usually earn higher APY.
InsuranceInsured by the FDIC up to $250,000 per depositor, per bank.Insured by the FDIC up to $250,000 per depositor, per bank.
Best ForGrowing money to use for a future milestone or purchase.Building up general savings over time or accumulating money to invest later.

When Is a CD a Better Option?

CDs offer safe and predictable returns on cash deposits. If you have money you want to save for a big purchase that’s a few years away, such as a new car or a down payment on a home, parking your money in a CD can help your savings keep pace with inflation — without the risk associated with investing in less predictable securities like stocks or mutual funds.

Some people also prefer the rigid rules of CDs as a way to keep them on the right track towards reaching their savings goals. Consider whether the threat of an early withdrawal penalty might help you avoid the temptation to dip into your savings for less than essential purchases.

This inability to add to your deposit or withdraw money from a CD early without penalty can also be a drawback for some savers. And, because your money is locked into a CD for a specific time, there is a risk that you may miss out on better interest rates down the line.

You can get around some of the disadvantages of CDs by using a strategy called CD laddering. When CD laddering, you split your total deposit up among smaller CDs with different maturity dates, each a year or so apart. As the shortest term CD reaches maturity, you roll the deposit plus interest into a new CD — thus continuing to add rungs to the “ladder.”

Allocating your deposit in this way frees up some of your money once a year should you need access to the funds without incurring an early withdrawal penalty. CD laddering is also useful in rising interest rate environments since you can roll your CDs into new agreements with better APYs as they mature.

When Is a Money Market Account a Better Option?

The most obvious reason to choose a money market account over a CD is flexibility. Unlike CDs, money market accounts allow you to deposit money into the account and take money out at any time. You can even write a limited number of checks with your money market account each month.

For this reason, a money market account might be better suited for someone who wants to continue adding funds to their savings. This type of account is also perfect for building up savings for a short-term goal or for multiple savings goals requiring liquidity.

Is a Savings Account Better Than Both Options?

If you’re building an emergency savings fund, you probably won’t want to keep that money in a CD or a money market account. Savings accounts are preferable to CDs when you want to add to your balance or withdraw your money at any time. A high-yield savings account would be the best option in this scenario, as you can earn a decent interest rate and enjoy the flexibility of a traditional savings account.

Money market accounts, while very similar to savings accounts, do often have higher minimum balance requirements than savings accounts. If you don’t yet have enough money to open and maintain a money market account, you may be able to find a high-yield savings account with similar returns but lower (or even zero) minimum balance requirements.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: April 21, 2022

6 Cited Research Articles

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