Money Market vs. Savings Account vs. CD: Which One Is Right for You?

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When you have extra cash, a bank or a credit union is an excellent place to keep your money safe. You can hold your emergency fund or vacation fund in an easily accessible account and, ideally, earn some interest.

But you have several options available for storing your money, including money market accounts, savings accounts, and certificates of deposit (CDs). All allow you to save money and earn interest on those savings. All are covered by FDIC insurance for deposits up to $250,000. But which is best? In this article, we review how these savings vehicles work—plus their pros and cons—so you can choose which makes the most sense for you.

Key Takeaways

  • CDs, money market accounts, and savings accounts are all FDIC-insured up to $250,000.
  • Money in a savings account or a money market account is typically more accessible than money in a CD.
  • CDs frequently pay higher interest rates in exchange for limited access to funds.
  • Money market accounts may have check-writing privileges or allow debit card payments.
  • Online savings accounts often require a low minimum deposit to open an account.
  • CDs’ lengths range from a few months to several years.

The Pros and Cons of Savings Accounts

A savings account is a bank or credit union account that pays interest on your savings. These accounts are generally liquid, which means you can withdraw funds whenever the need arises and add funds whenever you have extra cash available. When it’s time to spend your money, you can transfer funds to a checking account or withdraw cash directly.

Savings account interest rates vary widely. Some banks pay almost nothing, while others are more competitive. Interest rates are usually expressed as an annual percentage yield (APY). The APY tells you how much interest you’ll get on an annual basis, taking into account how frequently that interest compounds. 

Compound interest occurs when the interest you’ve earned earns interest itself.

You’ll typically find the best rates at online banks, local banks, or credit unions. Big banks don’t try as hard to win your business.

Pros
    • Frequently, low minimum deposit amounts can open an account
    • Easy to transfer money to and from your checking account
Cons
    • Low interest earnings compared to money market accounts and CDs
    • Typically a maximum of six outgoing transfers allowed per month

Moving extra money from a checking account to a savings account can help you manage your spending. When the money is sitting in checking, it may be tempting to spend.

The Pros and Cons of Money Market Accounts

Money market accounts are similar to savings accounts, but they can offer higher interest rates. Some also let you make payments directly from your money market account with checks, a debit card, or online bill pay. Savings accounts typically do not accommodate payments. That said, money market accounts often have the same six-per-month withdrawal limit, so they’re not suitable for everyday spending.

Pros
    • Easy to make occasional payments from
    • Potentially higher APY than savings accounts
Cons
    • Typically a maximum of six outgoing transfers allowed per month
    • May need a significant balance, such as $100,000, for the best rates

An FDIC-insured money market deposit account is not the same as a money market mutual fund. The latter is not insured by the FDIC.

The Pros and Cons of CDs

CDs are time deposits that pay relatively high interest rates. You commit to leaving your funds with the bank for three months to several years, and in return, banks reward you with a higher APY. However, if you withdraw funds early (before your CD’s term ends), you may have to pay an early-withdrawal penalty.

CDs typically offer a fixed rate for a specified length of time. For example, if you get a two-year CD, the rate is guaranteed for that entire term. If rates fall after you buy a CD, you benefit. But if rates rise, you generally don’t get a higher rate.

Some CDs are more flexible than traditional CDs. For example, liquid CDs allow you to withdraw funds before the term ends without paying early-withdrawal penalties. Other CDs enable you to “bump up” your rate if interest rates rise before your CD matures.

Pros
    • Higher rates in exchange for a longer-term commitment
    • Continue earning a high APY if interest rates fall after you buy
Cons
    • Potential early-withdrawal penalties
    • Risk of getting stuck with a low APY if rates rise after you buy

Comparing CDs, Savings Accounts, and Money Market Accounts


Savings Accounts Money Market Accounts CDs
FDIC-insured Yes Yes (but not money market mutual funds) Yes
Check writing No Sometimes No
Debit card payments No Sometimes No
Access to available balance Instant Instant Restricted
Add to your savings Anytime Anytime Rarely
APY 0.01% to 0.70% APY 0.01% to 1.15% APY 0.05% to 1.40% APY

So which account should you use for your savings? It may come down to how quickly you need your money. 

Savings Accounts: Best for Safekeeping

A savings account is an excellent place to hold funds that you don’t need immediately but still need access to. By getting money out of your checking account, you avoid the temptation to spend it, plus you earn a bit of interest. In many cases, savings accounts do not have high minimum balance requirements or monthly maintenance fees, making them a good choice for building up your savings.

Money Market Accounts: Best for Easy Access

Money market accounts make it easy to spend from your savings while providing a better return than standard checking accounts. For example, you might keep funds for an upcoming payment or your emergency savings in a money market account. You can’t use the account for everyday spending because of the monthly transaction limit. But it’s a great place to keep money for large, infrequent payments (like a mortgage payment).

Certificates of Deposit: Best for Long-Term Savings

When you don’t expect to use your funds, you can potentially earn the most interest with CDs. Decide how much you’re comfortable locking up, learn about early-withdrawal access or penalties, and consider the impact of interest rates rising (or falling) after you buy a CD.

Research minimum balance requirements and monthly fees at any bank or credit union you’re considering. With a small balance, it might be best to stick with accounts that have no monthly fees—even if you earn a lower rate.

How Do I Choose?

The right account choice depends on how you intend to use your savings. You can even use a combination of accounts and draw on the strengths of each account type.

For money you might need quickly, a savings account or money market account is an excellent choice. While a savings account doesn’t allow you to spend directly from your balance, it’s easy to transfer money to a checking account for spending. That said, if you like the idea of paying directly from an interest-bearing account, a money market account might have the edge.

For longer-term savings, CDs are often a good choice. However, they come with the risk of early-withdrawal penalties. Plus, if interest rates rise after you lock in your rate, you may be disappointed and earn less interest than you otherwise could have.

Bank products might not keep up with inflation, so the value of your savings could erode over time. That may be a price worth paying when safety is a priority.

CDs, savings accounts, and money market accounts keep your money safe, putting them on the lower end of the risk and return spectrum. That’s the perfect place for money you can’t afford to lose—like your emergency fund. But the relatively low earnings in these accounts could lead to a loss of purchasing power over time. For long-term growth, explore alternatives like a diversified portfolio of mutual funds or exchange-traded fund (ETF) holdings. These investments can lose money when markets fall, but over the long term, they can be a good hedge against inflation. Be sure to consider your tolerance for risk and do plenty of research before investing.