Money Market vs. CD: Which Is Better? (2024) (2024)

What is a certificate of deposit (CD)?

A certificate of deposit (CD) is a savings account that allows you to earn a higher annual percentage yield (APY) than a regular savings account.

With a CD, you agree to deposit a certain amount of money with a bank or credit union for a fixed term, ranging from one month to several years. You cannot withdraw your funds without a penalty until the CD reaches its maturity date.

Pros and cons of CDs

CDs can be a good option if you’re looking for a low-risk, predictable savings plan. However, it's important to carefully consider the pros and cons to ensure that a CD aligns with your overall financial goals and needs.

Pros

The pros of CDs include:

• Safety: CDs are not affected by market fluctuations, making them a good option for risk-averse investors. CDs are a low-risk investment, as they are insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA), which means your money is safe even if the bank fails.
• Higher rate of return: CDs offer higher interest rates than regular savings accounts and have a guaranteed return on investment.
• CD laddering: CD laddering is a strategy of opening different CDs with differing maturity dates. This spreads out your investments and allows you to have continual access to a portion of your funds.
• Fixed term: CDs have a fixed term, which allows for predictability and consistency in your savings plan.
• Variety of terms: CDs come in different term lengths, ranging from a month to several years. Even if you cannot commit to a CD for a year, you can still boost your savings with short-term CDs.

Cons

It’s important to be aware of the potential downsides of CDs:

• Early withdrawal penalty: Most CDs will penalize you for touching your money before the maturity date. The penalty is usually in days of interest rather than a set fee.
• Lower returns: If you lock your money into a CD, you may miss out on higher-yielding opportunities, such as investing in the stock market.
• Inflation risk: Inflation can outpace the interest rate of the CD, and although you have a guaranteed rate, you could lose money due to a drop in the dollar’s value.
• Minimum deposit requirement: Some CDs require a high minimum deposit to open.
• No flexibility: Once your CD account is open, you will not be able to adjust the term length or interest rate. It is locked in until maturity.

What is a money market account?

A money market account is a type of bank account that combines the benefits of a savings account with a checking account. It typically offers higher interest rates than traditional savings accounts, while also allowing for check writing and debit card transactions.

MMAs are similar to traditional savings accounts in that they are FDIC-insured but differ in the fact that these accounts often have higher minimum balance requirements and may have limited transaction allowances.

Money market accounts pros and cons

For those who don’t want to lock away their money for a set term, MMAs are a good alternative. Consider these pros and cons to see if they work for you.

Pros

There are a number of pros of money market accounts:

• Safety: Like CDs, MMAs are considered low-risk and are insured up to $250,000.
• Flexibility: Your funds aren’t untouchable until a maturity date. If you need to access your savings, you can do so through check, ATM or debit card.
• Competitive rates: Expect higher interest rates for MMAs versus regular savings accounts and other low-risk savings products.

Cons

The drawbacks of money market accounts include the following:

• Minimum balance requirements: Depending on the financial institution, MMAs may require higher minimum balance requirements than traditional savings accounts.
• Withdrawal limits: While an MMA is more accessible than a CD, there is a limit to how many transactions you can make per month. Going over this limit will result in fees.
• Fees: MMAs may come with higher fees than traditional savings accounts, such as maintenance fees or transaction fees.

Differences between money market accounts and CDs

Both money market accounts and certificates of deposit offer the potential for higher yields than a traditional savings or checking account, but there are key differences to note. For one, MMAs have more liquidity than CDs — meaning you can access your funds quickly and easily without incurring any penalties. Most CDs come with early withdrawal penalties, which will include some or all of your interest earnings.

Another notable difference is that MMAs have variable rates and tend to fluctuate more than CD rates since they are tied to current market rates. Most CDs come with a fixed rate that you lock in for a set amount of time. An MMA might generate more interest than a CD at some points, but if the market drops, so does an MMA’s APY.

» MORE: Interest rates and how they work

Which should you choose?

When deciding whether a CD or MMA is better for your savings strategy, Michael Ashley Schulman, a chartered financial analyst, advises that you compare the rates and fees of both products. You also need to choose which features you want your savings investment to have and how accessible it needs to be.

“If you seek easy access to your money and want to be able to write checks or make withdrawals, a money market account might be a better choice,” said Schulman, who is the chief investment officer at Running Point Capital.

“If you have a lump sum of money that you won't need for a specific period and you're comfortable with locking in your funds for a set term, a CD might offer a better return,” he added. “However, if you are unsure on when you will need the proceeds, be aware that CDs are subject to withdrawal penalties.”

» READ: How to avoid a CD withdrawal penalty

Bottom line

When it comes to saving money, either a CD or MMA can make for a better choice than a regular savings or checking account. Compare the rates of both products and consider splitting your investment to include each of these saving vehicles — that way, you can take advantage of both an MMA’s liquidity and a CD’s fixed, often higher rate.