Money Market Account vs. Certificate of Deposit (CD): Which One Should I Choose?

The current economy and unpredictable interest rate environment have many American consumers and business owners feeling uncertain of the future, looking for ways to protect their funds and grow their wealth. In today’s environment, it’s more important than ever to feel confident your money is working for you.

You can take advantage of rising interest rates with high-yield savings options, but knowing which ones to choose can be confusing if you aren’t familiar with what’s available. Let’s look at two popular options: a money market account vs. a CD or a certificate of deposit. Understanding each product can help you decide which option makes the most sense for your savings goals.

In this blog, we’ll explore the following:

• Money market account vs. CD: what are the benefits and differences?
• Which one should you choose?
• Why save now?
• How and when to decide?

Money Market Account vs. CD

Money market accounts and CDs are bank products that both offer peace of mind if you want to be more disciplined about saving. Unfortunately and surprisingly, many people don’t know these options are available to them. When looking at money market accounts vs. CDs, the choice comes down to your objective for cash and your need for liquidity. In other words, what are you saving for, and do you need immediate access to your money? Let’s look at the basics of each:

1. What is a Money Market Account?

You might first ask: money market account vs. savings account: what’s the difference? Money market accounts are deposit accounts that provide savings account benefits with the features of a checking account. Like a savings account, money market accounts pay interest, but money market accounts provide a debit card and checks, so you can access your money without going into a branch. Generally, money market accounts have higher interest rates than regular savings accounts and greater liquid access than savings. If you compare money market accounts vs. savings accounts, you’ll find they offer similar benefits, but a money market account gives you more flexibility.

Interest rates for money market accounts rise and fall with the interest rate market. Additionally, money market accounts frequently offer tiered rates, meaning your rate may increase with the amount of money in your account. Whether or not this is attractive to you depends on how much you have to put into the account initially. They do often have larger minimum balances than savings accounts.</p

The benefits of a money market account are:

• You have the option to add and withdraw money regularly.
• You get checking-account perks with higher interest rates.
• You can receive higher rates with higher initial deposits.

2. What is a Certificate of Deposit (CD)?

A certificate of deposit, or CD, is another high-interest savings option with a fixed (or locked) rate and fixed term. When you invest in a CD, you keep your money in the account for a set time – usually between three months to six years – and earn interest on it. CDs generally have higher interest rates than other savings account types because you commit to longer-term investments. A locked rate is good because it gives you a predictable return on your deposit over a specific time, and a bank cannot change the rate and reduce your earnings. When interest rates are high, a locked rate is appealing, but it is important to know that if the rate changes during the term of the CD, your rate will stay the same.

Locking in a rate with a CD also means you will be penalized if you decide to withdraw your money before your maturity date. CDs are a good choice when you know you will not need liquid access to your money and feel confident in your maturity date. They are also a good choice if you are looking for a higher return on investment but are not comfortable with the risk or volatility of stock and bond markets.

The benefits of CD accounts are:

• You get a higher interest rate than traditional savings or money market accounts.
• You have a fixed interest rate that won’t change.
• You are guaranteed a predictable rate of return.

3. Money Market Account vs. CD: 

We’ve reviewed the difference between a money market account vs. savings and explored the money market accounts and CD benefits. Now that you know the basics of each product, you might wonder how to choose. The reality is both are great federally insured savings options if you are looking for safer investments when uncertainty in the economy is high.

Deciding which type of account best suits your needs depends on your goals, risk tolerance, and access needs. If you’re looking for an easy way to save for retirement or plan for future expenses but still want access to your funds, then a money market account may be the right choice. On the other hand, if you have extra cash now, you won’t need to access it soon, and if you want to earn more interest over time, then CDs might be worth considering.

Let’s look at some scenarios where you might choose one over the other.

Money Market Over a CD:

• You're saving for a car but want access to funds in case another emergency arises, and you need to tap into that money.
• You want to take advantage of high-interest rates for a short-term savings goal –like a vacation or wedding – and grow savings more quickly than traditional savings.

CD Over Money Market:

• You’re saving for a house in five years and know you won’t need access to the funds during its term.
• You want to be more disciplined about your savings and leverage locked terms as motivation to keep money in the account.

Save with Both:

• You want the best of both worlds and have the flexibility to save with both accounts.
• You want to take advantage of high-interest rates with both types of accounts but may need both short-term savings and access and long-term savings options.

Why Save Now?

The Federal Reserve saw record interest rate hikes in 2022, with more likely happening this year. Now is an excellent time to invest in a money market account vs. savings, or choose a CD, because of their higher yields. If you are concerned about future job security or want to ensure a safety net for future use, taking advantage of high-yield options in a high-interest rate environment is a good choice.

How and When to Decide?

Choosing how and when to save your money is a big decision. Whether you are considering money market accounts vs. CDs, or you are open to both, use the following as a guideline to help you in your decision-making process:

1. By getting this far, you have taken the first step to understanding the basics of money market accounts vs. CDs.

2. Evaluate and write down your individual goals, financial circumstances, and liquidity needs.

3. Pay attention to the current interest rates and how they impact each account. Knowing the rates is essential, but keep in mind they are only one part of the equation and can change over time.

4. Most importantly, research your financial institution options. With volatility in uncertain times, having a trusted financial partner has never been more critical. A relationship with a bank or financial advisor (near you if preferable) who understands your unique situation can benefit you because they can offer personalized advice.

Ultimately, now is a great time to start thinking about saving to ensure your money stays safe and grows over time despite any economic uncertainty or downturns that may occur in the future.

^{Taking charge of your finances can be challenging, but investing in yourself and saving for your future is crucial. Choosing the right savings option depends on your preferences, how often you need access to the funds, and how much risk you take. We’re here to help. Let us show you the best way to start building wealth for yourself today.}