Money Market Accounts, Savings Accounts and CDs: Which is Best?

Savings accounts, money market accounts, and certificates of deposit (CDs) have a few things in common: they’re relatively safe places to save your money and earn interest. However, there are some key differences between them, including how much they cost, how they limit withdrawals, and how much you can earn over time. Here’s a breakdown of these different accounts, how they differ from each other, and how to choose the right one for you.

What is a money market account?

A money market account, or MMA, is a savings account that earns interest based on the amount in the account. In some ways, a money market account is like checking and savings rolled into one: you get a debit card and checks that let you spend and withdraw while you earn interest.

Note: A money market Account is a remunerated deposit account. A money market funds is an investment account.

Advantages:

  • Easy access. You can use your card as you would a regular debit card or withdraw cash from an ATM.
  • Higher interest payments. The best money market accounts may pay a higher interest rate than best high yield savings accounts and considerably more than the average savings account.
  • FDIC or NCUA insured. Money market accounts are available at banks insured by the Federal Deposit Insurance Corporation (FDIC) and in credit unions insured by the National Credit Union Administration (NCUA). This means that your money – up to $250,000 – is protected and you won’t lose it if, for example, the bank or insured credit union declares bankruptcy. (Money Market fundshowever, are not insured by the FDIC or NCUA.)

The inconvenients:

  • Limited withdrawals. Money market accounts may have withdrawal limits. Under the excessive trading rule known as Regulation D, most savings accounts are technically limited to six withdrawals per month (which extends to overdraft protection transactions, third-party payments , wire and telephone transfers and ACH withdrawals). In 2020, Regulation D was suspended and some banks removed these withdrawal limits; However, some banks still charge fees for exceeding withdrawal limits.
  • Higher minimum balance requirement. Some banks may require you to maintain a higher minimum balance compared to other types of accounts.

Best for: Those who want to earn a higher interest rate and won’t need to make more than six withdrawals per month.

What is a savings account?

A savings account balance between security, access and cost. These accounts generally pay a significantly lower amount of interest, although best high yield accounts may offer higher rates.

Advantages:

  • No negative return risk. Although your interest rate may vary, you will not lose money on your deposit.
  • Your money is protected. Like money market accounts, savings accounts are insured (by the FDIC in banks and the NCUA in credit unions) up to $250,000.
  • A low maintenance place to store your cash. Whether you’re building an emergency fund, setting aside funds for a down payment, or saving money for a rainy day, a savings account offers simplicity and security.

The inconvenients:

  • Limited access. A savings account has one function: to save money. If you need to use the funds, you will first need to transfer them to a checking account or make a withdrawal.
  • Withdrawal restrictions. As noted above, Regulation D technically limits most savings accounts to six withdrawals per month, although some banks have suspended enforcement of this rule.
  • Lower APY. Some banks offer very low interest rates on deposits in savings accounts, although the best high-yield savings accounts currently offer annual percentage returns that can be comparable to money market accounts.

Best for: Those looking to store money securely for the long term.

What is a CD?

A certificate of deposit, or CD, is a fixed-interest savings account with restricted access for a set period of time, from a few months to five years or more. Usually, the longer the time, the higher the interest rate you earn. While other accounts allow you to add money at any time, a CD requires an initial deposit.

Advantages:

  • Higher interest rate. Compared to other types of savings accounts, CDs can offer higher interest rates.
  • Fixed interest rate. Once you open a CD, the interest rate will not change. This means that your deposit is protected against falling interest rates.
  • Predictable. Because you are depositing a fixed amount with a fixed interest rate, you will know exactly how much money you will earn at the end of your term. A one-year CD with a 2% APY on a $1,000 deposit will earn you $20 in interest after one year.

The inconvenients:

  • Minimum deposits. Most CDs require a larger initial deposit than a savings or money market account.
  • Less flexibility. Once the money is credited to your account, you cannot withdraw it. If you have to withdraw early, you will lose some of your penalty interest.
  • Rates could increase. If you open a CD and the prices go up, you’ll miss out on the benefits. Because you’re locked in for a fixed term, you’re locked in with your fixed interest rate until the end of your term.

Best for: Those who want to save money and protect themselves against future interest rate cuts.

Which is better, a money market account or a CD?

A CD may offer a higher interest rate compared to a money market account, but it is much less flexible. You cannot spend the money on a CD, where funds from a money market account can usually be used with a debit card or check.

Which is better, a money market account or a savings account?

Money market accounts and savings accounts are similar, but a money market account makes spending easier. Although an MMA generally offers a higher interest rate than a traditional savings account, it also tends to have a higher minimum balance requirement than a savings account.

As long as you’re comfortable with limited access to your funds, a money market account will likely offer the highest interest rate. But if you plan to make more frequent withdrawals, a high-yield savings account may be better suited.