Both money market accounts and certificates of deposit (CDs) enable your savings to generate interest. In general, money market accounts offer lower interest rates but more flexibility in withdrawing money. CDs, on the other hand, tie up your money for a period of time, but they likely offer a better interest rate.
After you start saving some money, you will likely consider the many ways to generate interest on your savings. Although you may have a traditional savings account, you can look at a money market account or a certificate of deposit (CD) as other options that will suit your situation. However, choosing between money market and CD can be difficult.
While both money market accounts and CDs have similarities to traditional savings accounts, they often have higher interest rates. This means your savings will grow faster over time, but it’s good to know the pros and cons of these types of accounts.
Read on to learn how to choose between a money market account and a CD, as well as details about these two account types.
Choice between money market account and CD
When choosing a savings account such as a money market account or a CD, it can be helpful to consider the similarities and differences. It is also helpful to think about your specific situation, including your short-term and long-term needs.
Use the table below to get to a savings account that could work for you.
|Money market account vs. CD|
Money market account
|Allows up to six withdrawals per monthThis enables short-term investments.||Money is usually tied up for a Set the period, so better than a long-term investment.|
|Usually has one higher interest rate than a traditional savings accountbut often lower than a CD. The interest rate can change over time.||Usually has one higher interest rate than most other savings accountsbut lower than stocks. Predictable Fixed Rate.|
|Generally No penalties or fees.||Might include Early withdrawal penalties.|
|Can require a minimum balance from $ 500 to $ 25,000 or more.||Can require a minimum balance from $ 500 to $ 10,000 or more.|
|Supported by FDIC insurance up to $ 250,000.||Supported by FDIC insurance up to $ 250,000.|
While this provides a comprehensive overview of money market accounts and CDs, it can also be useful to take a closer look at both account types.
What is a money market account?
A money market account is a type of savings account that earns interest over time. As with a traditional savings account, a money market account allows you to withdraw money up to six times a month. Some money market accounts even contain debit cards for easy withdrawals.
However, the main reason for choosing a money market account is that it may have a higher interest rate than a traditional savings account. However, this higher interest rate is often due to a required balance, which can vary from $ 500 to $ 25,000 or more. The interest rate on a money market account can also change over time.
It is important that money market accounts are insured with the Federal Deposit Insurance Corporation (FDIC). This means your money will be covered up to $ 250,000 by the federal government if the financial institution holding your money goes down.
Here are the key points to keep in mind when considering a money market account:
- Similar to a savings account: You can withdraw funds up to six times a month, often with a debit card.
- A minimum balance may be required: Your account may require a minimum balance to keep it open.
- Might have a higher interest rate: Higher interest rates will help your money grow faster. For a $ 10,000 deposit, the difference between 0.1 percent and 1 percent interest rate after five years is nearly $ 500.
- Money is FDIC insured: Your account is insured up to $ 250,000 by the federal government.
While money market accounts offer a flexible way to store your savings, a CD may offer even higher interest rates – but with less flexibility.
What is a CD?
A deposit slip (CD) is a type of savings account that requires a set deposit for a set period of time. Unlike a traditional savings account, you generally cannot make regular withdrawals from a CD without a penalty. Instead, you have your money returned to you with interest after a set period of time – just a few months and up to five years or more.
In return for a lack of flexibility, however, CDs often offer higher interest rates than money market accounts. In addition, the interest rate on a CD is fixed so you can predict exactly how much money you will make over time when you invest in your CD.
Your CD may require a minimum deposit – usually between $ 500 and $ 10,000 – but most CDs do not incur an account fee for their duration. However, a CD usually comes with an early withdrawal penalty. So you should make sure that you don’t need access to this money during the entire term.
Like money market accounts, CDs are backed by the FDIC, which means your investment is protected up to $ 250,000 by the federal government.
You should consider the following with CDs:
- Set duration: A CD has a fixed duration – usually several months or years.
- May include penalties for early withdrawals: If you need access to your money, you can withdraw it, but you may have to withhold interest or pay a fine for it.
- In general, they have higher interest rates than other savings accounts: Although they are less flexible than other accounts, they generally have higher interest rates. Prices are usually set for the life of the CD too, so you know exactly how much interest you are going to generate.
- Supported by the federal insurance: Your investment is protected up to $ 250,000 by the FDIC, which is part of the federal government.
With all this knowledge, you can start thinking about whether a money market account or CD is right for you.
Whichever account you choose, you are making an excellent decision so that your savings grow with interest over time. In addition to savings accounts, you should also consider tax-privileged retirement accounts, which offer long-term savings and potentially higher returns over time.
To continue your austerity efforts or commit to saving each month, it is important to keep track of all of your accounts for a bird’s eye view of your financial picture. Once you have a budget, you are well on your way to meeting your financial goals.