Money market accounts, savings accounts, and certificates of deposit (CDs) can give your savings a boost by earning interest, all while keeping your money safe.
Understanding how these interest-bearing deposit accounts work, and the differences among them, can help you make the best choice.
What is a money market account?
A money market account is an interest-bearing savings account available at most banks and credit unions. You can usually write checks from it and may come with a debit card.
Withdrawals from money market accounts used to be limited to six per month under the Federal Reserve’s Regulation D. The Fed removed that limit in April 2020 and hasn’t reinstated it yet, so banks aren’t currently required to enforce this withdrawal limit. As a result, some banks have done away completely with withdrawal limits while others are still enforcing it.
Yields on deposit accounts have skyrocketed over the last year as a result of the Fed’s interest rate hikes — and that includes money market accounts. As a result, you can now find money market accounts with yields comparable to those found in savings accounts.
What is a savings account?
A savings account is the most basic type of bank account designed for storing your savings. Banks will make an interest payment into your savings account each statement period.
When you open a savings account, you’ll be required to deposit some money into the account, though some banks have no minimums to open an account. You can add and withdraw money as you need to, but you won’t get a checkbook to access the money. Instead, you’ll have to rely on online transfers or make withdrawals in person at your bank. Some banks will let you make ATM withdrawals if you have a debit card linked to a checking account.
As with money market accounts, banks were limited in the number of withdrawals that were permitted from savings accounts to six each statement period. Some banks are still enforcing this limit, but others have eliminated it completely.Typically, going over the limit can result in a fee, emphasizing that the account is designed for longer-term storage of your money rather than frequent transactions.
What is a CD?
A certificate of deposit (CD) is an account that you can use to save money for a set period of time.
When you open a CD, you have to decide how much money to put in the account and how long you want to keep the money in the account. For example, you may choose to open a one-year CD. CD terms can range from a few months to five years or longer.
Once the account is open, you cannot withdraw your money until the selected amount of time has passed. If you do, you usually have to pay a penalty fee. In exchange for this loss in flexibility, banks tend to offer higher interest rates on CDs than on other accounts.
Most CDs offer fixed rates throughout their term. Once you lock in your interest rate, it won’t change, making CDs good for savers who want a guarantee that their interest rate won’t drop. However, if market rates rise, the money in the CD will be stuck at a lower rate, which can make long-term CDs a risk.
Differences between deposit accounts
Money market account vs. CD
A money market account differs from a CD in that the money market account has checking account features. For instance, you can usually write checks from it. You may also get a debit card. Additionally, a CD is a time-deposit account, while a money market account isn’t.
Typically, a money market account pays less than a CD because a CD requires you to keep your cash in the account for a set period of time.
Money market accounts with higher yields typically require you to maintain a higher balance to earn the highest APY, but you may need more money up front to open a CD.
Money market account vs. savings account
The primary differences between money market accounts and savings accounts are their flexibility and fee structures.
Savings accounts are relatively flexible but usually don’t come with checkbooks and debit cards like money market accounts. Money market accounts are explicitly designed to give account holders an easy way to spend the money in the account. Savings accounts are not as flexible, and you need to take a few extra steps to access and spend money that you have in the account.
The other difference is that savings accounts are generally much easier and less expensive to open. Many savings accounts have no or low minimum balances and low or no fees. Many money market accounts have much higher minimum balance requirements and monthly fees. This makes them more popular with people who have larger balances and who want the flexibility to make large purchases.
Pros and cons of money market accounts, savings accounts and CDs
In order to compare these products, it’s important to understand their advantages and disadvantages.
Money market accounts
Check to see whether the APYs are tiered. Often, you’ll have a lower APY until you reach a certain balance, and then the APY increases. A balance of $100,000 or more, for example, could earn you a higher interest rate than an account with less than $10,000.
Pros
- Higher interest: Compared with interest checking accounts and many savings accounts from the largest banks, you can generally expect a higher rate of interest.
- Accessible funds: A money market account may come with check-writing privileges, maybe even a debit card, and the ability to make electronic transfers.
- Safe place for your money: Your account is protected from loss at any federally insured bank or credit union.
Cons
- Limited withdrawals: Unlike a checking account, which doesn’t limit any types of transactions, money market accounts typically have restrictions. You can’t usually write unlimited checks or make unlimited electronic transfers.
- Account minimums: You’re often required to keep a higher account minimum than with a savings account or even a CD.
- Monthly fees: If you don’t meet the account minimum, there’s a good chance you’ll be charged a monthly fee.
Savings accounts
Some savings accounts do have minimum balance requirements, but they’re usually lower than a money market account. Like a money market account, though, withdrawals may be limited.
Pros
- Safe place for your money: Savings accounts at Federal Deposit Insurance Corp. (FDIC) and National Credit Union Administration (NCUA) institutions are insured and highly liquid.
- Low fees and minimums: It’s possible to find high-yield savings accounts that charge no minimums or monthly fees.
- Access ATMs: You can usually access your savings account via ATMs, making it convenient to get money when you need it.
Cons
- Withdrawal limits: The number of withdrawals you can make in a month may be limited.
Certificates of deposit (CDs)
A CD is the most restrictive of these savings accounts. You usually need to commit a minimum amount of money to open a certificate of deposit and the money is locked away for a period of time, depending on the term you select. CD terms can range from a few months to five years.
If you withdraw the money before the CD matures, expect to pay a penalty. Depending on the size of the CD, you can earn a higher APY than you would with a savings account or money market account.
Pros
- Higher interest rate: Not only is the interest rate on a CD often higher than on other savings accounts, it is fixed and doesn’t vary over the term like you see with money market and savings accounts.
- No fees: As long as you don’t withdraw your money early, you won’t be hit with any fees.
- Choice of term lengths: You can choose how long you want to keep your savings tied up so it can earn interest. Banks commonly have multiple choices of CD terms.
Cons
- Low liquidity and access: You can’t withdraw money from a CD at an ATM or by writing checks. The money is not accessible unless you make an early withdrawal.
- Penalties: Pulling out money before the CD term is up will incur a penalty. Some CDs allow you to withdraw some of the money without penalty, but they typically come with lower APYs and other restrictions.
Comparing account features
Here’s a helpful comparison of account features. You can see the differences between different types of accounts you might see at a bank or credit union.
| Checking | Savings | Money Market | CD | |
|---|---|---|---|---|
| FDIC/NCUA insurance | Yes | Yes | Yes | Yes |
| Check-writing | Yes | No | Maybe* | No |
| Debit/ATM card | Yes | Maybe* | Maybe* | No |
| Liquidity | Yes | Yes | Yes | No |
| Limited transactions | No | Maybe* | Maybe* | Yes |
| Relative APY | Low | High | High | High |
*It depends on the bank.
How to use money markets, savings and CDs to save for your goals
Each of these accounts can help you save for different financial goals. You can use these accounts together to work toward your goals and maximize your earnings.
- Short-term goals: A savings account is a good fit for near-term plans, like a vacation. You won’t earn a lot of interest, but if you’re going to need the money soon, that won’t matter much.
- Medium-term goals: A money market account may be well-suited for medium-term goals because it requires a higher minimum balance and pays a higher yield. In addition, it’s liquid enough that if you need to tap your funds earlier than you planned, there are no penalties for early withdrawals.
- Long-term goals: CDs make sense if you are saving for a goal that is several years off, such as buying a house, especially if you have a big sum of money that you can afford not to touch for a long time. Plus, CDs have a fixed rate, so you need not worry about rate fluctuations.
Risks of using money market accounts, savings accounts and CDs
Although your money is protected from bank failures by FDIC insurance and from credit union failures by NCUA insurance, there are other risks to keep in mind as you consider these savings products:
- Inflation: The biggest risk you’re likely to encounter is inflation. As consumer prices increase, your yield may not keep up with inflation. While you won’t lose your principal, you could see an erosion of your purchasing power over time.
- Rate fluctuations: Some accounts are more sensitive to the macroeconomic environment. Yields on savings, money market accounts and CDs are based on market conditions. When rates fall so does the yield.
With a CD, you have some protection from rate volatility because you lock in the rate for the term length of the CD. But if the CD matures during a low-rate environment and you renew the CD, you’re stuck with a lower yield than you had before. You’ll also want to avoid an automatic renewal in that scenario.
Many investors choose to offset the inflation risk of these deposit accounts by having other investments, such as stocks.
Bottom Line
When it comes to saving and earning interest on your money, it’s important to understand the differences between money market accounts, savings accounts, and CDs. While all three offer a safe way to store your savings, they each have unique features and advantages. Money market accounts offer flexibility with check-writing and debit cards, savings accounts are more accessible and have lower fees, and CDs offer higher interest rates but with a commitment to keep your money locked away for a set period of time.
To make the best choice, consider your financial goals and situation. And remember, it’s always wise to diversify your savings and investments to protect against inflation. So, whether you’re saving for a short-term goal or building long-term wealth, understanding these deposit accounts can help you make the best decision for your financial future.
— Libby Wells wrote a previous version of this article.
