Money Market Account Vs. CD: Which is Better for Investing?
EG
Summary:
Money market accounts and CDs both allow you to earn a bit of extra money on your savings. But despite their similarities, they’re best suited for different financial goals.
When looking for a place to store their savings to earn extra cash, many people turn to savings accounts. But those aren’t your only options. Money market accounts and certificates of deposit also allow you to keep your money safe while earning extra money for your savings.
Are you wondering whether a money market account or CD is better for you? In this guide, we’ll break down how money market accounts and CDs work, when each one is better, and a few alternatives worth considering.
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What is a money market account?
A money market account is a type of bank or credit union deposit account that combines some of the features of savings and checking accounts. Similar to a savings account, a money market account allows you to earn a return on your savings. However, the annual percentage yield (APY) you can earn depends on the current market interest rates.
Because the money in money market accounts is primarily meant for saving instead of spending, there are withdrawal limits on how often you can access your money. You can only make up to six withdrawals per month.
But money market accounts also have some features of a checking account. Despite the limit on withdrawals, money market accounts often come with debit cards and check-writing privileges so you can spend directly from the account or withdraw funds at an ATM.
Because money market accounts are deposit accounts, the money in them is insured by the Federal Deposit Insurance Corporation. FDIC insurance covers up to $250,000 per financial institution per ownership category.
Pro Tip
A money market account isn’t the same as a money market fund, which is a type of mutual fund that invests in short-term debt securities. Money market mutual funds may offer a slightly higher return but aren’t protected by FDIC insurance.
What is a CD?
A CD — short for a certificate of deposit — is a banking product that, like a money market account, allows you to earn a bit of extra money with your savings.
CDs differ from other deposit accounts because they aren’t designed for you to deposit and withdraw money at any time. Instead, each CD has a set term during which you’re supposed to leave the money in the account. CD terms generally range from just a few months to several years. Generally speaking, the longer the term, the higher the APY.
When the CD reaches maturity, you receive your initial deposit, along with any interest you earned. The APY on a CD is guaranteed only if you leave the money in the account until it matures. And if you withdraw it early, you could be subject to an early withdrawal penalty.
Like money market accounts, CDs are FDIC insured. This means if the bank or credit union that holds your CD goes bankrupt or out of business, you’ll get your money back.
Money market account vs. CD: Which is better?
Money market accounts and CDs are both interest-bearing deposit accounts, meaning they both provide a way for you to earn a bit of extra money on your savings. They have some similarities, including being FDIC-insured. However, these accounts also have some important differences.
The primary difference between a money market account and a CD comes down to how accessible your money is. The money in a money market account is easily accessible using checks or a debit card, while the money in a CD is intended to remain there until the account reaches maturity.
When it comes to whether a money market account or CD is better, there’s no right answer. Instead, each one is better for different situations.
| Money market accounts | CDs | |
|---|---|---|
| Earn interest on funds | ✓ | ✓ |
| Easy access to money | ✓ | |
| Limited withdrawals | ✓ | ✓ |
| Early withdrawal penalties | ✓ | |
| Best for short-term savings | ✓ | |
| Best for long-term savings | ✓ |
When a money market account is better
A money market account is better when you want easy access to your money. These accounts have some limitations — you can only make up to six withdrawals per month. Other than that, it’s easy to access the money in your account when you need it. In fact, the money in these accounts is even more accessible than a savings account, thanks to the check-writing privileges and debit card.
Because of how accessible the money is, a money market account is best for any money you know you’ll be spending relatively soon. You could use this type of account for a short-term financial goal, your emergency fund, or spending money.
Pro Tip
Are you comparing money market accounts and wondering which is best for you? We’ve rounded up a list of the best money market accounts so you can learn which has the best rates, the best customer reviews, and more.
When a CD is better
A CD is a better fit for money you’re saving away for a longer-term financial goal. These accounts have longer maturity times and could charge early withdrawal penalties if you withdraw funds early. As a result, you should only use these accounts for money you know you won’t be using until the CD expires.
For example, suppose you’re planning to buy a home in about two years. You could use a CD for that money, choosing one with a maturity date slightly before your financial goal so you know you’ll be able to access it without a penalty.
A CD could also be a good fit for the money you’re saving that you don’t want to be tempted to spend. If you have a bad habit of dipping into your savings for impulse purchases, putting that money in a CD could help prevent that. However, you should still make sure you won’t actually need that money before the CD reaches maturity.
Pro Tip
With so many CDs to choose from, it can feel overwhelming to decide on one. Our comparison tool breaks down the best certificates of deposit, along with their APYs, terms, minimum balance requirements, and more.
Money market account and CD alternatives
Money market accounts and CDs are two types of accounts that allow you to earn interest on your savings. However, they aren’t the only options available.
High-yield savings accounts
Historically, both money market accounts and CDs had higher APYs than a traditional savings account, making them attractive alternatives. However, with an increase in online banks and credit unions offering high-yield savings accounts, it’s now easier than ever to earn a decent interest rate from a savings account.
In fact, many savings accounts now offer higher interest rates than some money market accounts and interest rates that are competitive with CDs. And when you opt for a savings account over a CD, you don’t have to worry about early withdrawal penalties for accessing your money.
Money market funds
Another alternative to these accounts is a money market fund. While it sounds similar to a money market account, they’re actually two different products. A money market fund is a mutual fund that invests in short-term debt securities.
Because of the assets that money market funds invest in, they still have very low risk compared to many other investment products. However, they generally provide a higher return than CDs and money market accounts.
Bonds
Another alternative to money market accounts and CDs is bonds, which are debt securities offered by government entities and corporations. A bond is essentially a loan you make to the issuing entity. You earn interest during the bond term, and then you get your principal amount back when the bond reaches maturity.
Bond risk spans a wide spectrum. U.S. Treasury securities are virtually risk-free since they’re backed by the federal government. On the other end of the spectrum, corporate bonds can either be low-risk or medium-risk depending on the credit rating of the company that issued them.
Unless you’re investing in U.S. Treasury securities, bonds do have some risk. As a result, you probably shouldn’t invest money you can’t afford to lose, such as your emergency fund.
Stocks
One of the major downsides of both money market accounts and CDs is their low returns. Unfortunately, the interest rates on these accounts rarely keep up with inflation. Over the long run, the money in these accounts is actually losing value.
Because of their higher returns, stocks can be a great alternative for any money you’re investing that you won’t need for several years. Yes, the stock market has a higher risk than deposit accounts, but you’re also likely to get a higher return, making it a better long-term investment.
If you’re still new to stock investing, reach out to one of the brokerages below. They’ll have a better idea of how to wisely invest your money.
FAQs
Can a money market account lose money?
Money market accounts are banking products that are insured by the FDIC, similar to a checking account or savings account. As a result, you don’t have to worry about losing money. However, keep in mind that inflation rates may make your money worth less than it was when you first opened the account.
Can you lose money in a CD?
Just like money market accounts, the money in your CDs is insured by the FDIC. As a result, you won’t lose money. However, you could be subject to early withdrawal penalties if you don’t leave your money in the account until it matures. Similar to money market accounts, inflation rates may also cause your funds to lose value in a CD.
What is a disadvantage of a money market account?
One of the biggest disadvantages of money market accounts is their low return. Because their APYs don’t keep pace with inflation, they aren’t appropriate to save money for long-term financial goals.
Key Takeaways
- A money market account is a deposit account that has features of a checking account and savings account, allowing you to earn interest while still having easy access to your money.
- A CD is a banking product that allows you to earn a certain interest rate on your savings as long as you leave them in the account until it reaches maturity.
- Money market accounts are best when you want easy access to your money, such as for short-term financial goals or spending money.
- CDs are a better fit for longer-term financial goals when you won’t need the money until after the CD reaches maturity.
- Some alternatives to money market accounts and CDs include high-yield savings accounts and brokerage accounts.
EG
Erin Gobler is a Wisconsin-based personal finance writer with experience writing about mortgages, investing, taxes, personal loans, and insurance. Her work has been published in major outlets, such as SuperMoney, Fox Business, and Time.com.
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