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If you’re saving up for a big purchase such as a dream vacation, new home, or even just a grocery-getter car, money market accounts and CDs are two great tools to help you get there.
They’re both readily available at banks and credit unions, and they both generally offer higher interest rates than a savings account. Depending on your savings goals, however, one might be a better choice for you than the other. Choosing the wrong one could result in extra fees and more time to reach your goal.
Fortunately, deciding between a money market account and a certificate of deposit doesn’t have to be complicated.
What is a Money Market Account?
Money market accounts are common staples of financial institutions like banks and credit unions. They’re a great choice for a lot of people, but it’s important to understand how they work.
Money Market Definition
Normally, banks and credit unions get the money to pay you interest on your savings account from the interest they charge on loans. With a money market account, that money instead comes from other sources of income — namely, relatively safe investment products.
That’s why many banks offer higher interest rates on money market accounts; they earn interest on your savings. In turn, they share some of that income with you too.
Another advantage of money market accounts is the ability to write checks just like you would with a checking account. However, this account is a hybrid of checking and savings, meaning it has features of each.
Namely, the six-withdrawal limit for savings accounts still applies to a money market account. Aside from ATM and in-person withdrawals, you can only make six transactions taking money out of the account per statement period.
If you go over this limit, you’ll usually have to pay a penalty fee.
When to Choose a Money Market Account
Money market accounts are a great choice if:
- Your bank or credit union offers a higher rate on them than a normal savings account.
- You need access to your money and cannot commit to leaving it alone for a set period of time.
- You want to keep adding new money into your account as you earn it.
In general, most banks and credit unions offer higher interest rates for money market accounts than for savings accounts. But that’s not always the case.
It’s always a good idea to compare the interest rate offered on the two accounts at any given financial institution. If the savings account rate is higher, then it’s probably worthwhile to go with that account instead.
Assuming that the money market account does offer a higher interest rate, it’s a great choice for accounts like emergency funds. That’s because there’s no penalty for withdrawing money from the account as long as you stay under the six-withdrawal monthly limit.
Money market accounts also allow you to make deposits into the account at any time. If you want to continue setting aside money as you earn it, a money market account is a good option. You can even set up automatic deposits into the account if you choose.
What is a CD?
CDs also make great short-term investments, though they’re not ideal for every scenario.
CD stands for certificate of deposit. Credit unions refer to them as Share Certificates. CDs generally offer some of the highest interest rates of all the different accounts available at banks and credit unions.
A certificate of deposit is a type of “timed deposit account.” That means you agree to keep the money in the account for a specific period of time, known as the “term length.” Term lengths usually range from a few months to a few years.
You can’t add more money to the account after it’s open. Generally, CDs require a high deposit — at least $500 to $1,000 at many banks.
The longer the term length you choose, the higher the interest rate you’ll receive. Sometimes, banks and credit unions also offer higher rates for “jumbo CDs,” which require you to deposit at least $100,000 into the account.
A CD has “matured” when its term length has come to an end. At that point, most CDs will automatically roll over into a brand new CD, although you’ll have a short “grace period” of 7-10 days where you can withdraw the money for free.
If you want to withdraw your money outside of the grace period window, you’ll have to pay a penalty. This is an “early withdrawal,” and in some cases, the penalty costs can negate your interest earnings.
When to Choose a CD
A CD is a great option when:
- You already have a significant amount of money saved.
- You’re sure you won’t need the money before the term length is finished.
- You want to earn as much money as possible on your savings without investing in riskier products, such as the stock market.
Because you can’t add to or withdraw from CDs once they’re open, you’ll need a significant chunk of your savings goal on hand to get the most benefit from this account.
CDs are also better choices if you know you won’t need the money until a certain date. For example, if you’re saving up for a house down payment and you know you won’t be in the market for a home for another couple of years, a CD could be a great option.
If you’re the type of person who is easily tempted to raid their savings account, a CD can help you break that habit. Since there’s a penalty to withdraw the money early, that might provide you with enough incentive to keep the money in the account until you need it for your savings goals.
Even though CDs earn some of the highest interest rate possible at banks and credit unions, they’re still FDIC or NCUA insured. That means you’re guaranteed to get your money back if the institution happens to go under, unlike if you invest in stocks or bonds.
Money Market vs. CD Comparison
Let’s dive a little bit deeper into the similarities and differences between these two types of accounts.
CD and Money Market Similarities
Both CDs and money market accounts require a higher deposit amount than a savings account. CDs generally require at least $500-$1,000 to open — sometimes more, depending on the bank.
Money market accounts vary. Some banks and credit unions have no minimum opening deposit requirements, but most require at least a few hundred dollars.
Both CDs and money market accounts are FDIC or NCUA insured, and both of them generally offer higher interest rates than on a regular savings account.
CD and Money Market Differences
The biggest difference between these two types of accounts is that once you open a CD, you can’t make further deposits or withdraw the money until it’s reached maturity without paying substantial early withdrawal penalties.
With money market accounts, on the other hand, you have access to your money at all times.
While CDs come with early withdrawal penalties, money market accounts often have other types of fees. If you make more than six withdrawals per month, then you can expect to pay an excess withdrawal fee. Similarly, you’ll be charged if you overdraw on your balance, similar to a checking account.
It’s also easier to withdraw money from a money market account vs. a CD. You can request a checkbook for your money market account, and some even come with an ATM card. To withdraw money from a CD, however, you’ll need to contact the bank or transfer the money between your accounts online.
Choosing Between a Money Market or CD
Both of these account types are great options for reaching your savings goals.
In general, choose a money market account if you want the option to add or withdraw money more easily. Money market accounts make great choices for emergency funds, holiday savings funds, vacation savings funds, and more.
CDs, on the other hand, are better choices if you have a specific date in mind when you’ll need the money or if you already have a fully-stocked emergency fund. CDs are an especially good choice if you already have most or all of the money you need already on hand and you just want a safe place to store it while earning a high interest rate.
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