Money Market Accounts vs. CDs: What's the Difference?

When it comes to saving money, you have a number of account options. You might first think of a simple savings account that allows your money to grow according to a set interest rate. You also have the option of choosing a money market account or a certificate of deposit (CD). A money market account is like a mix of a savings account and a checking account. A CD, on the other hand, doesn’t offer much flexibility in accessing your money with set term and withdrawal limits. When determining the best fit between money market accounts vs. CDs, this is what to consider.

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What Is a Money Market Account?

Money market accounts (MMAs) are useful money management tools. They are best described as a hybrid of a savings and checking account.

Money market accounts earn interest much like savings accounts do. Plus, MMAs typically have more favorable rates than a typical savings account. However, like a checking account, money market accounts often include ATM cards and check-writing abilities. You will want to double-check with your bank, though, since not all money market accounts offer these perks.

However, MMAs don’t have the complete flexibility of checking accounts. MMAs do limit you to six outgoing transactions per statement cycle, just like with a savings account.

You may also want to be wary of MMA minimums. Higher minimum deposits and balances can come at a cost of better interest rates. This usually means minimum deposits of $2,500 or higher, with some even reaching five figures.

What Is a CD?

Certificates of deposit (CDs) are term-based deposit accounts. When you open a CD, you choose your term length from the options your bank or credit union give you. These terms usually range from three months to five years.

Once you open an account, you have to make a deposit. That deposit stays for the entire term length, during which you cannot make any withdrawals or additional deposits. This definitely limits how easily and how often you can access that money.

The whole setup of CDs is to lock away your money for a set amount of time while it earns interest. This allows the issuing bank to use your money during that time for other purposes. Then, when your CD reaches maturity, you’ll receive your initial deposit back, plus all the interest it earned over the term.

If you were to try to make a withdrawal during your term, you’ll face a pretty hefty penalty. This usually deducts days or even months of interest earned from your withdrawal, depending on your CD term length.

CDs can also require high minimum deposits, whether $500 or $10,000. This limits potential customers from opening a CD if they can’t set that amount of money aside.

Money Market Accounts vs. CDs: Which Is Better for You?

A family deciding between a money market vs. CD.

Comparing money market accounts and CDs overall isn’t entirely fair since they are structured so differently.

Money market accounts are better than CDs if you’re looking for a more accessible account. You can easily deposit and withdraw funds to and from a money market account using an ATM card, personal checks, online services or the mobile app.

Be sure to double-check whether your bank issues ATM cards or personal checks with their money market accounts. Your main limitation will be the restricted number of transactions you’re allowed each statement cycle.

CDs, on the other hand, are all about limiting access to your money. Once you open an account and make your initial deposit, you cannot move money in or out of the account without facing a heavy penalty. This may help you, though, if you’re prone to spending and not saving. If that’s the case, a money market account may give you too much freedom.

When it comes to interest rates, money market accounts may be the way to go. MMA rates are typically higher than basic savings accounts and short-term CD rates. CDs can have higher rates than a money market account, but those are often longer-term accounts lasting two years and longer. That means to snag a CD rate higher than a money market account rate, you will most likely have to wait a few years before gaining access to that money.

Where You Can Open Money Market Accounts and CDs

You can find both money market accounts and CDs at banks and credit unions. Not all banks offer money market accounts. Chase Bank, for example, does not. However, most banks do offer CDs ranging in term lengths and rates.

You’ll find the best interest rates for both types of accounts at online banks like Discover Bank and Ally Bank. These banks don’t have to maintain the costs of brick-and-mortar locations, so they offer some of the highest rates in the industry. They typically also charge lower fees, if at all.

When to Use a Market Account or CD

Use a money market account when you want to earn interest and still have easy access to your money. These accounts are helpful for emergency funds or short-term savings goals because you can withdraw money with checks or an ATM card, although there may be limits on how many times you can do this each month. Money market accounts usually pay more interest than regular savings accounts.

A CD works better if you don’t need to touch the money for a while. CDs are good for long-term goals, like saving for a home down payment or a future vacation. You choose a fixed term, and your money stays in the account until the term ends. If you take it out early, you will usually pay a penalty.

The main difference is flexibility. A money market account gives you access to your cash but usually pays less interest than a long-term CD. A CD offers higher interest for locking in your money. To choose, consider how soon you’ll need the money and how much interest you want to earn.

Bottom Line

A woman reviewing the difference between a money market vs. CD.

Both money market accounts and CDs offer useful but different ways to save and access your money. MMAs are good for those who want to keep their money within easy reach, either through an ATM card or a checkbook. You should make sure you can handle that easy access, though. On the other hand, CDs offer a great way to set money aside and forget about it for a few months or even years. That way, you can let your money grow undisturbed.

Work with a financial advisor who can help you determine the best strategies to grow your money long-term.

Tips for Saving Your Money

Building a financial plan with your savings is important, and a financial advisor can help. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Often, it’s easiest to open a savings account with the bank you might already have a checking account with. But that bank may not offer a great interest rate to grow your money. It helps to shop around for the best savings accounts and even the best checking accounts to find a bank that you’re comfortable with and that has the highest-earning interest rates.
To calculate how much interest you could earn with a CD, you can use SmartAsset’s CD calculator.