Money market or CD: Which is right for you? | Fidelity (2024)

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Key takeaways What is a money market fund? What is a CD? What are key similarities and differences between a money market fund vs. a CD? When might a money market fund make sense? When might a CD make sense? Open an account with us More to explore Get more Fidelity Smart MoneySM Bond special report Looking for more ideas and insights? Thanks for subscribing! We're on our way, but not quite there yet Oh, hello again! Thanks for subscribing to Looking for more ideas and insights? You might like these too: Fidelity Viewpoints® Decode Crypto Fidelity Smart Money℠ Active Investor Insights from Fidelity Wealth Management ℠ Women Talk Money Educational Webinars and Events FAQs

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Money market or CD: Which is right for you? | Fidelity (1)

Key takeaways

  • Both money market funds and CDs are relatively safe investments, delivering an income stream in the form of interest or dividends.
  • Money market funds are generally more liquid than bank or brokered CDs.
  • Interest rates on money market funds and CDs are influenced by the federal funds rate, which the Federal Reserve raises or lowers in response to inflation.
  • The interest paid on a money market fund can fluctuate daily whereas the interest rate on a fixed-rate CD remains the same for the term of the CD.
  • CDs issued by a bank insured by the Federal Deposit Insurance Corporation (FDIC) are covered by FDIC insurance up to applicable limits, while money market funds are not FDIC-insured.

Looking for a relatively safe place to stash money and trying to decide between a money market fund and certificate of deposit (CD)? "Right now, both are offering great rates for investors looking to invest some of their short-term money," says Richard Carter, vice president of Fixed Income Products & Services at Fidelity Investments. Here's how to figure out which may make more sense for you.

Money market or CD: Which is right for you? | Fidelity (2)

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What is a money market fund?

A money market fund operates in much the same way as other mutual funds: It pools investors' money to buy a basket of securities. But instead of buying stocks, long-term bonds, and the like, a money market fund buys low-risk, short-term debt, such as US Treasury bills or commercial paper, with the objective of preserving principal and daily access to your money.

There are 3 different types of money market funds, each named for what they invest in: government,1prime,2and municipal or "tax exempt."3 Government funds invest in cash, US government securities, and repurchase agreements (to buy a security at a price and sell it back at an agreed-upon price) with US government securities and cash as collateral. Prime funds may invest in the same things but also corporate debt such as commercial paper and CDs. Municipal funds mainly invest in municipal securities and strive for income that is exempt from federal income tax and, in some cases, from state income tax.

A money market fund is an investment product (a security) and should not be confused with a money market account, also known as a bank money market deposit account, which is an interest-earning bank product insured by the FDIC that may come with a debit card or checks and may limit the number of withdrawals in a given time period. A money market fund seeks to preserve a $1.00 value per share, but it is not insured or guaranteed by the FDIC or any other government agency. It allows unlimited withdrawals, making it flexible, plus yields may edge slightly higher than rates on money market accounts, so be sure to compare.

What is a CD?

A traditional certificate of deposit obtained directly from a bank typically pays a fixed interest rate over a specified time period. In return for committing to leave your money in the CD for a certain number of months or years, its interest rate is generally higher than what is offered for a regular savings account that you can tap without paying an early withdrawal penalty. (Some banks offer variable-rate or step-up CDs with interest rates that change.) Typically, the longer the investment period, the higher the interest rate you'll earn. If you don't touch your CD until it reaches maturity, you get back your principal (what you paid for it) plus the interest. CDs are issued by banks and are insured by the FDIC up to $250,000 per depositor, per insured bank, for each account ownership category. If offered by brokerage firms, they are known as brokered CDs, which can be bought or sold before reaching their maturity dates on the secondary market.4

See Also
Money market vs cd: How to choose?Money Market Accounts Vs. Savings Accounts Vs. CDs | BankrateMoney Market Funds vs. CDs: How To ChooseMoney Market vs. CD: Which Account Could Help Your Money Goals?

What are key similarities and differences between a money market fund vs. a CD?

Money market fund vs. CD: Key similarities and differences
Bank traditional CDs Money market funds
May be appropriate for Investors seeking potential greater returns on cash who are willing to commit to specific time periods Investors focused on preserving the value of their investment who prioritize access to funds over rate of return
Investment period (maturity) Varies months to years No time commitment required
Access Typically a penalty if withdrawn before maturity Easily retrieve funds to get cash, pay a bill, or make another investment in your account
Growth potential Limited over the long term, but possible to ladder to diversify across different time frames and rates Limited over the long term
Current rates & yields Not offered by Fidelity Research current rates and yields
Earnings rate Normally fixed for the term Normally changes daily
Earnings payment Typically principal and interest returned at maturity Dividends accrued daily, paid monthly (plus occasional capital gains)
Product insurance or guarantee FDIC Not insured or guaranteed by the FDIC or any other government agency
Potential tax benefits n/a Municipal funds for taxable accounts (e.g., nonretirement)
Minimum investment $0 or more $0 or more

When might a money market fund make sense?

A money market fund may make sense for fast, flexible access to your cash. If you already have an account with a brokerage firm, you may choose to put your cash in a money market fund until you use it to, say, pay a bill or buy a stock or other mutual fund.

When might a CD make sense?

A bank CD might be a better option if you can keep cash locked up for extended periods. Perhaps you're saving for a big expense such as a home renovation and want to limit risk while earning a fixed rate of interest as long as you avoid early withdrawal penalties. You might be able to lock in a higher rate for a set period before interest rates tumble. "When considering which CD to buy: First determine your holding period, then look for the best rate," suggests Carter.

But a bank CD with an early withdrawal penalty may not be the right choice when instant liquidity is important, like with an emergency fund. "For this reason, make sure you have enough cash in highly liquid form to cover your typical expenses plus some amount in an emergency fund first before you start contemplating the potential for higher rates available on CDs," says Carter.

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Money market or CD: Which is right for you? | Fidelity (2024)

FAQs

Is it better to put money in a CD or money market? ›

Money market accounts provide access to funds and offer interest rates similar to regular savings accounts. CDs earn more interest over time but have restricted access to funds until maturity. Money market accounts are a better option when you need to withdraw cash.

Continue Reading ›
What is the downside of a money market account? ›

Many accounts have monthly fees

Another drawback to remember is that while they have high yields, money market accounts can also come with cumbersome fees. Many banks and credit unions will impose monthly fees just for the upkeep of your account.

View Details ›
Are CDs safe if the market crashes? ›

Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.

Discover More Details ›
What is the biggest negative of putting your money in a CD? ›

Banks and credit unions often charge an early withdrawal penalty for taking funds from a CD ahead of its maturity date. This penalty can be a flat fee or a percentage of the interest earned. In some cases, it could even be all the interest earned, negating your efforts to use a CD for savings.

View More ›
Why is CD not a good financial investment? ›

CD rates tend to lag behind rising inflation and drop more quickly than inflation on the way down. Because of that likelihood, investing in CDs carries the danger that your money will lose its purchasing power over time as your interest gains are overtaken by inflation.

View Details ›
Can I lose money in a money market account? ›

Since money market accounts are insured by the FDIC or the NCUA, you cannot lose the money you contribute to the account—even in the event of a bank failure. You can, however, be subject to fees and penalties that reduce your earnings.

View More ›
How much will $10,000 make in a money market account? ›

Currently, money market funds pay between 4.47% and 4.87% in interest. With that, you can earn between $447 to $487 in interest on $10,000 each year. Certificates of deposit (CDs). CDs are offered by financial institutions for set periods of time.

Read On ›
How much money should you keep in a money market account? ›

Some money market accounts come with minimum account balances to be able to earn the higher rate of interest. Six to 12 months of living expenses are typically recommended for the amount of money that should be kept in cash in these types of accounts for unforeseen emergencies and life events.

Find Out More ›
Can I lose my money in a CD account? ›

Standard CDs are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000, so they cannot lose money. However, some CDs that are not FDIC-insured may carry greater risk, and there may be risks that come from rising inflation or interest rates.

Read More ›
How much will a $500 CD make in 5 years? ›

This CD will earn $108.33 on $500 over five years, which means your deposit will grow by 21.7%.

Read On ›

Why did my CD lose value? ›

That said, inflation, early withdrawal penalties and interest rate fluctuations can all eat into your CD's value. Making sure you select the right CD term for your needs and seeking out the best CD rates for that term can help you maximize your investment.

See More ›
Why is CD better than money market? ›

Higher Interest Rates Compared To Other Savings Options

CDs typically offer higher interest rates compared to regular savings or money market accounts.

Get More Info ›
Is it better to put money in a CD or savings? ›

Savings accounts give you more flexibility to make withdrawals, but CDs offer fixed interest rates that can boost some savings if you're able to leave your money alone for a set time. The best place to deposit your cash generally depends on how long you're willing to leave it in your account.

View Details ›
Should I buy a CD now or wait? ›

If you're in a position to save in today's higher interest rate environment, investments like CDs could help accelerate your savings. CD rates have skyrocketed since 2022: 1-year CD rates have increased more than twelve-fold, with 3-year and 5-year CDs up nearly six-fold and five-fold, respectively.

View Details ›
Can a money market account lose money? ›

Since money market accounts are insured by the FDIC or the NCUA, you cannot lose the money you contribute to the account—even in the event of a bank failure. You can, however, be subject to fees and penalties that reduce your earnings.

See Details ›
Should I move money from stock market to CD? ›

When deciding between a long-term CD or putting money in the stock market, always take into account your goals and how long you'll need to achieve them. For long-term plans like retirement, the market offers better returns than locking up your cash in a CD.

See Details ›
Do you pay taxes on money market accounts? ›

Income earned from money market fund interest is taxed as regular income, up to 37% depending on the investor's tax bracket. While some local and state taxes offer breaks on income earned from U.S. Treasury bonds, federal income tax still applies.

Get More Info Here ›
Should I keep money in a money market account? ›

If you want to maximize how much interest you earn on your savings, a money market account can be a good option compared to other savings accounts because it usually earns a higher rate of interest. Plus, if you need quick access to your money, you can do so in a variety of ways.

View Details ›
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