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Banking 101: Money Market vs. CD - What’s the Difference?


Written by Stephanie Vozza | Published on 11/14/2019

Note: This article is part of our Basic Banking series, designed to provide new savers with the key skills to save smarter.

Money market accounts and certificates of deposit (CDs) are low-risk savings vehicles that are insured up to the legal limit per account by the Federal Deposit Insurance Corp. (FDIC).

With a certificate of deposit, you deposit money for a certain length of time. Once the term is over, you can withdraw the money penalty-free — with interest. Meanwhile, a money market account is similar to an interest-bearing checking or savings account, offering access via a limited number of monthly withdrawals.

We’ll look at money markets versus CDs as we break down both for you.

In this article we will cover:

Money markets vs. CDs: Differences

Interest rates

CDs generally offer higher yields than money market accounts. The average APY on one-year CDs is 1.267%, while the average APY on money market accounts is 0.399%. But interest rates may change depending on the length of your term or the amount of your investment.

For example, Customers Bank is offering a money market account with a guaranteed 2.25% APY through June 2020 if you deposit a minimum of $25,000. TotalDirectBank offers a 12-month CD with 2.25% APY for the same $25,000 minimum deposit.

Safety

While both types of accounts are generally safe when it comes to protecting your initial deposit, there are added risks with CDs.

If you experience an emergency and need to withdraw CD funds, you’ll most likely pay a penalty. The average early withdrawal penalty on a one-year CD is 120 days’ interest. The average penalty jumps to 255 days’ interest on a five-year CD.

With money market accounts, you’re limited to certain types of telephone and electronic withdrawals, including transfers from savings accounts up to 6 per statement cycle, per Federal Regulation D. If you go over that amount, you could be charged a fee.

You need to consider how important liquidity is before deciding which account to choose.

Money market accounts

Advantages

  • The ability to make withdrawals each month provides increased liquidity if you need access to your funds; many accounts offer the convenience of check-writing
  • Variable interest rates mean you can earn more than you expected (though, this could be a disadvantage if the APY drops)
  • Can often earn higher rates with a higher balance
  • Some accounts don’t require a minimum balance, which can reduce your financial commitment

Disadvantages

  • Interest rates are often lower than CDs, which would result in a lower yield
  • Some accounts charge fees if you don’t maintain a minimum balance
  • Federal law mandates certain types of telephone and electronic withdrawals, including transfers from savings accounts up to 6 per statement cycle; some banks may limit that number further

Certificates of deposit

Advantages

  • Come with terms that range from a few months to five years
  • Interest rates are often fixed and typically rise with longer terms; you’ll be certain of the amount you’re earning
  • You can withdraw your investment — with interest — at the end of your term
  • Save money without the temptation to withdraw it for unnecessary spending

Disadvantages

  • Lacks liquidity, limiting your ability to switch accounts if interest rates rise
  • Could be charged steep penalties for an early withdrawal (though there are no-penalty CDs where you’ll typically earn a lower interest rate as a result)
  • Don’t offer access to your funds through checks, ATM transactions or transfers
  • CDs routinely have minimum balance requirements; for example, Marcus by Goldman Sachs® requires a minimum of $500

What about a savings account?

Savings accounts usually require little to nothing to open and may not require minimum balances. A savings account could be good if you are just starting to save.

Some online banks offer high-yield savings accounts. For example, Vio Bank offers 2.07% APY on all balances in its high-yield online savings account. Whether you choose a money market account, CD or savings account, it’s important to shop around for the best rates.

For comparison, the average APY on personal savings accounts is 0.278%.

Money markets vs. CDs: Which should you choose?

Money Markets vs. CDs: Recap
Money Market Accounts Certificates of Deposit
Fixed or variable interest Variable (although some offer fixed rate for introductory term) Fixed
Average APY 0.383%
  • 1-year CD: 1.267%
  • 2-year CD: 1.485%
  • 3-year CD: 1.646%
  • 4-year CD: 1.757%
  • 5-year CD: 1.965%
Access Up to 6 withdrawals a month Possible penalty if withdrawing before end of term

A money market account could be a good choice for long-term savings goals or for parking an emergency fund since it usually pays higher interest than a traditional savings account. Money market accounts are also helpful if you want the ability to write checks instead of having to transfer funds, making it convenient to save and pay for a big purchase.

If you have money you know you won’t need for a while, CDs are good for setting aside money. An early withdrawal penalty may give you the discipline you need to let it grow untouched.

For many, a combination of money market accounts and CDs is the best option. You can take advantage of interest rates and liquidity to reach your savings goals.

All rates current as of 11/14/2019
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