If you have some savings you’d like to earn interest on, but you’re thinking a regular savings account won’t quite cut it, consider using a money market account or a certificate of deposit (CD). Which one is best for you depends on your earnings expectations and what kind of access you need.
Money market accounts vs. CDs: a quick overview
A money market account is a deposit account that earns interest like a savings account, but allows you access like a checking account. With a money market account, you can get a competitive interest rate on your balance and limited check-writing and debit card access.
A CD is a savings account that generally requires you to leave your money deposited for a certain amount of time. When the time is up, or the CD matures, you can cash it out or “roll it over” for another term. CDs usually offer higher rates than money market accounts.
Here’s a look at the two types of accounts at a glance:
CDs and money market accounts are equally safe places to keep your money.
Both CDs and money market accounts are deposit accounts. That means that at FDIC-member banks, your money is protected by the Federal Deposit Insurance Corporation up to the maximum amount allowed by law. (To get the full protection the federal insurance provides, make sure your combined deposits are within federal limits by checking out the FDIC’s online calculator.)
In other words, your cash in either type of account is about as safe as it can get.
Ally Bank Tip: Money market account sounds a lot like money market mutual fund. They are entirely different products. A money market mutual fund is an investment product that is not FDIC-insured. You can learn more about those here at Ally Invest.
CDs are all about the rates.
If your number one priority is earning the highest interest rate, CDs are likely your better bet. CDs, especially longer-term CDs, usually offer higher APYs (annual percentage yields) than other types of deposit accounts, including money market accounts. And, there are several types of CDs to choose from to meet different needs.
What’s more, CDs usually have fixed rates, so if you “lock in” a great rate up front, it’s yours throughout the term of the CD. You can estimate your earnings and play around with term lengths and deposit amounts by plugging your numbers into a CD calculator, like this one.
However, CDs usually require you to leave your money deposited for a certain amount of time. If you withdraw your money before the specified time, you might end up paying a withdrawal penalty. And, you can’t really add money to your CD until it reaches maturity and you renew it for another term.
Money market accounts are all about the easy access.
If you need to have regular access to your funds, you’re better off using a money market account than a CD. That’s because with a money market account, you can make up to six withdrawals per statement cycle (per federal limits) and make as many ATM withdrawals as you want.
In addition, you can add money to your money market account balance whenever you like, so you don’t accidentally spend the cash you’ve earmarked for savings.
A note about money market account rates: Although CDs generally will offer higher interest rates in exchange for leaving your deposit alone for a while, that’s not to say you can’t get a great rate on a money market account. Shop around and compare APYs to find a competitive rate and be sure you understand all the terms of any account you consider.
Ally Bank Tip: Because online banks don’t have the overhead of traditional brick-and-mortar banks, they can pass the savings on to you in the form of great rates.
So which is a better way to go, money market account or CD?
Whether a CD or a money market account is best for you depends on your priorities for your savings. Generally speaking, if you need flexible access, open a money market account; if you don’t, take advantage of higher CD rates.
Don’t forget, though, that there’s no rule saying you can’t have both. You may want to open a CD for long-term goals, and a money market account for shorter-term goals or maybe even an emergency fund.