CDs vs. money market accounts: Which is best for you?

Our writers and editors used an in-house natural language generation platform to assist with portions of this article, allowing them to focus on adding information that is uniquely helpful. The article was reviewed, fact-checked and edited by our editorial staff prior to publication.

When building your savings, it is important to choose an account that not only offers a competitive interest rate to best grow your savings but also will allow you to access your money should you need to.

Money market accounts (MMAs) and certificates of deposit (CDs) each provide a boost to your savings by offering competitive rates but differ in how liquid — the ability to be converted into cash easily at any time — they are. Both accounts are readily available and can be found at traditional banks, online-only banks and credit unions, providing consumers with lots of options.

CD vs. money market

CDs and money market accounts are both types of savings accounts that help you stow away extra funds and grow your savings with interest. Money market accounts are typically what most people think of when they imagine a savings account, earning interest and allowing you to access your funds with an ATM card and checkbook. CDs, on the other hand, are more restricted in their flexibility, only allowing you to access your cash without penalty when the CD matures.

Here are some key differences between CDs and money market accounts:

• CDs generally offer higher interest rates compared with money market accounts.
• Money market accounts provide access to funds and offer interest rates similar to regular savings accounts.
• CDs earn more interest over time but have restricted access to funds until maturity.
• Money market accounts are a better option when you need to withdraw cash.

Both CDs and money market accounts are insured at banks that are insured by the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Administration (NCUA) for up to $250,000 per institution and account type, so your principal and earned interest are protected in case your bank fails.

How money market accounts work

A money market account is a safe place to stash your money at federally insured financial institutions. These accounts can pay you competitive interest rates that can boost your overall savings. Money market accounts typically pay variable interest rates, which means the rate can rise and fall depending on market conditions.

In general, these funds are accessible and make it relatively easy for you to retrieve your savings a few times each month, though there may be limits to how many times you can move money out. Typically, the cap limits withdrawals to six a month, though some banks allow more, following a move by the Federal Reserve to relax the limit in response to the coronavirus pandemic. Contact your bank to confirm its withdrawal and transfer policies.

Money market accounts typically come with a debit card and/or checkbook, making it easier to access your funds should the need arise.

How CDs work

A CD, is another type of federally insured savings account easily found at banks and credit unions (where they’re often called share certificates). CDs pay a fixed interest rate. Longer-term CDs, such as five-year CDs, tend to pay higher rates than shorter-term CDs, like six-month CDs and one-year CDs. Unlike money market accounts, however, CDs don’t offer the flexibility of easy access. In exchange for agreeing to lock your money up for an agreed period, banks and credit unions agree to pay a set yield for the length of the CD term, typically three months to five years.

No matter what term you choose, you can use Bankrate’s CD calculator to see just how much interest you’ll earn.

When money market accounts are a better fit

A money market account is a good way to grow your savings, but it’s not the best fit for everyone. Here are two situations when a money market account makes sense:

You want easy access to your funds

A money market account allows you to spend or transfer funds a few times each month or statement period. Though monthly transaction limits typically apply, most consumers will find it’s possible to work within those guidelines to cover any emergency expenses.

A money market account is a better choice than a CD if you’re looking for someplace to stash an emergency fund and may need immediate access to it. CDs are subject to an early withdrawal penalty, should you decide to take funds out of a CD before its term ends.

You’re looking for a short-term boost to savings

Money market accounts often offer competitive interest rates and provide a better return than a traditional savings account, for example. A higher APY can go a long way toward helping you achieve a short-term savings goal, such as a vacation, wedding or new computer. With a money market account, you’re able to grow your savings more quickly without risking any principal while still maintaining easy access to your funds.

When CDs are a better fit

CDs are a good choice for those looking to grow their savings over a longer term without needing access to the funds that are stashed away. Here are some situations when a CD might be a good option for you.

You want to lock in a high APY

If you’re looking to earn more interest, a CD usually offers higher rates than a money market account.

While rates on both CDs and money market accounts are variable, CDs usually have fixed rates. That means you can lock in a higher interest rate on money that you won’t need to access soon.

You have a long-term plan for these funds

CDs, with their set terms, are an easy way to impose some financial discipline, since withdrawing money before the end of a term comes with a penalty.

When you open a CD, you are choosing to lock your funds away for a specified period. Depending on the term, it might range from a few months to several years. If you have a specific plan for these funds — and won’t need to tap them in an emergency — then a CD might be a good fit.

If you plan to buy a house in five years, for example, then a CD could be the right place to stash a down payment, allowing you to take advantage of the most competitive interest rates while still providing access to the funds when you are ready to purchase your home. Plus, there’s no worry about losing money, unlike investing in stocks or other types of nonguaranteed investments.

You want these savings locked away

Saving money can be difficult. If you struggle to keep from spending your savings account, then a CD could be a good choice. The funds will be off limits for the entire term, unless you’re willing to pay an early withdrawal penalty — incentive to keep from dipping into your savings to explore a last-minute sale at your favorite store. Plus, your savings will be growing through the term.

How to get a money market account or CD

When you’re looking to grow your savings with a money market account or CD, you’ll find many options at your local bank or credit union. But be sure to compare rates and access to funds; the rates and terms at online banks can be significantly better.

Rather than rely on a single account for all of your savings, consider opening separate money market accounts for specific savings goals, such as emergencies, travel and a home down payment.

Combining assets in a money market account can lead to higher interest rates through tiered yields.

CD rates fluctuate, so it’s recommended to regularly survey the market, especially online banks, to find attractive APYs.

Bottom line

Whether you choose to open a money market account or a CD, it’s important to consider both rates and accessibility. It is a good idea to put your money to work in one of these low-risk options if you can’t risk losing any money. But make sure to determine your goals before making either choice.