Money Market vs. CD

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You’re looking to park your money for short-, medium-, or long-term growth and need to know whether a money market or certificate of deposit (CD) is right for your needs.

Good news: You’ve come to the right place.

The truth is that you really can’t go wrong with either a money market or CD, as both types of financial products offer great benefits for investors. It’s more of a question of picking the right option to meet your financial goals.

After all, you don’t want to accidentally lock your money up for longer than it’s needed. At the same time, you don’t want to cheat yourself out of getting the strongest possible interest rate on the market.

Quick Look: Money Market Account vs CD

  • Money market accounts offer easier access to your money, but in return, they offer rates comparable to high yield savings accounts.
  • CDs generally offer higher rates, but in return, your money is locked up for whichever term you choose (with the highest rates offered for the longest terms). You’ll be charged a penalty if you withdraw early.
  • Some money market accounts offer checking account perks, like debit cards, ATM access and checks.
  • Both CDs and MMAs are insured, so you don’t need to worry about losing your money in a bank failure.
  • Both CDs and MMAs are offered through banks and credit unions, so investing in either is relatively easy.

Ready to start saving?

Now that you have a quick understanding of the two, let’s dive deeper into each of these saving vehicles.

What is a Money Market Account?

A money market account is an interest-bearing account offered by a bank or a credit union.

This type of account is very similar to a traditional savings account or checking account. When you sign up for a money market account, you’ll receive some of the standard items that you would receive from traditional bank accounts — like checks and an ATM card that gives you easy access to your cash. However, money market accounts typically offer higher interest rates than you will find with regular savings accounts.

In some ways, money market accounts are similar to high-yield savings accounts (HYSA) offered by online banks. However, you will not typically find ATM cards, debit cards, or checks issued by online-only banks.

In both cases, you can expect to have monthly transaction limits that restrict how much money you can move out of your accounts. Exceeding monthly transaction limits will not typically void your account. But if you go over a bank will knock down your interest rate as a penalty.

Are All Money Market Accounts FDIC insured?

Both money market accounts and CDs are insured by national agencies.

If you open a money market account through a traditional financial institution, the Federal Deposit Insurance Corporation (FDIC) will insure up to $250,000 of your funds.

If you obtain a money market account from a credit union, the National Credit Union Administration (NCUA) will insure it.

MMA vs. Money Market Mutual Funds

A money market account is an interest-bearing solution that’s offered by credit unions and banks. They are considered very safe investments, with gains based on the amount of money you put in and the amount of time you keep it there.

Money market mutual funds are still safe, but they are a bit different than money market accounts. That’s because money market accounts technically hold deposits while serving as investment vehicles. These funds invest in safe assets that mature over a relatively short amount of time (often within one year). When you invest in a money market fund, you will earn interest on cash reserves in your portfolio.

It’s certainly possible to own both money market accounts and mutual funds. But it’s important to know the difference and understand what you’re getting involved with before you sign up.

The Pros and Cons of Money Market Accounts:

Pros

  • FDIC or NCUA insured
  • Flexible and easy to move money around when needed
  • Competitive rates vs. traditional savings accounts

Cons

  • Variable interest rates can swing depending on the overall economy
  • Lower interest rates compared to CDs
  • Minimum balance requirements

What is a Certificate of Deposit?

A certificate of deposit (CD) is a type of savings account offered by banks and credit unions. When you invest in a CD, you deposit the funds into an account with the stipulation that you will not touch the money until a certain date.

CDs are a very common type of investment vehicle used by investors of all ages and financial situations. You can use a CD to protect some of your retirement money or simply to maximize your overall portfolio.

How Long Do CDs Last?

CDs can vary significantly in terms of how long they last. Some banks offer CDs for as short as 30 days while other products can last for five to 10 years.

The duration that you select is entirely dependent on your financial situation and your overall financial goals and risk tolerance. However, investors should be cautious about taking out long-term CDs because they can be highly restrictive.

Accessing Your Money from a CD

Most banks tend to charge early CD withdrawal penalties based on the plan that you sign up for. In other words, a three to 12-month CD might charge you an early withdrawal penalty of three months’ interest while a CD term of 12 to 24 months might charge you a six-month penalty. It depends entirely on your bank and the CD term that you signed up for.

As you can see, an early withdrawal penalty can be significant, potentially wiping out all of the interest that you accumulate over a certain period of time.

Why Use a CD?

If CDs come with heavy early withdrawal penalties, then why are they so popular with investors?

It’s simple: Investors love using CDs because they lock you into a fixed interest rate for the entire duration of the term that you sign up for — shielding you from fluctuating interest rates and protecting your investment.

Investing in a CD through an IRA

If you’re worried that you might try and tap into your CD before the term ends, consider investing in CDs through a retirement plan like an individual retirement account (IRA), Roth IRA, 401k, or similar financial product.

Since your money will already be tied up in a tax-free retirement plan, you will have an easier time letting the money sit so that it can grow without interference. This is a great way to grow your initial deposit.

How to Invest in CDs

Investing in CDs is easy. You can do this through your local bank or credit union or through an online brokerage like Schwab, Fidelity, or E*TRADE.

Using an online brokerage will usually give you more visibility into your CD, letting you track growth and compare it to other investments. As such, many investors like to purchase CDs through brokerage firms.

Tip: Be Mindful of CD Fees

If you’re thinking about purchasing CDs, then you should strongly consider the types of fees that might be applied to the funds.

For example, if you go through a brokerage firm, chances are likely the brokerage will charge you to procure CDs. You should also look for potential end-of-term fees and monthly fees in addition to any early withdrawal penalties that you might encounter.

All fees should be clearly outlined in a fund’s prospectus, which you should scour before agreeing to anything. Otherwise, you could end up paying way more than you bargained for in the end.

The Pros and Cons of CDs

Pros

  • Fixed interest rate can lock you into an attractive rate
  • Easy to purchase
  • Varying terms to choose, from a few months to years
  • Secure investment

Cons

  • Fixed interest rate can limit you if market conditions change
  • Early withdrawal penalties and other fees
  • Risk of gains being limited by inflation

FAQs

What are MMAs?

Money market accounts are sometimes referred to as MMAs, which are different than money market mutual funds. An MMA is a type of deposit, while a money market mutual fund is a type of investment.

What is an annual percentage yield?

An annual percentage yield (APY) is a rate of return on an investment or savings deposit spread out over the course of a year.

An APY can change with little to no warning. For example, HYSAs from online-only banks tend to lure investors in with high APYs. However, in recent months, APYs have fallen off a cliff as the Federal Reserve slashed interest rates. This is the risk of investing in a variable fund.

What is a CD ladder?

A CD ladder is a strategy that you can use to spread a sum of money across multiple CDs.

In a CD ladder, all CDs will have different maturity dates. When one maturity date ends, you will have the option to reclaim your money or roll the funds over into another CD. CD ladders are designed to provide some level of flexibility and movement for investors who are using them to store large sums of capital.

Can CDs and money market accounts help me reach my financial goals?

CDs and money market accounts can certainly help you reach your financial goals. They’re not the only type of investment or savings plans that you should be using, but they can provide a tremendous amount of stability while protecting you from market volatility.

Take a look at any leading investor and you will find that they tend to have diverse portfolios with multiple types of accounts and securities — each serving a particular overall purpose. You’d be wise to mimic this approach.

Is a CD good for emergency savings?

If you’re looking to build an emergency fund, then you should avoid using CDs. This is largely because CDs will trap your money for an extended period of time. If you need money in a pinch, you’ll get penalized if you take it from a CD before maturity.

Remember: If you are trying to build an emergency fund, focus on liquidity. Opening a money market account or a HYSA is a much better option, as it enables you to access your money very quickly. You won’t be able to do that if you invest in a CD.

Emergency savings accounts can vary depending on your age and financial position. For example, if you’re in your early 20s, then you may only need to save for about six months of rent, grocery bills, utilities, and credit card payments. If you have a family to look after, then you’re going to want to set aside a larger portion to access when it’s needed.

Do CDs and MMAs have minimum requirements?

Certain CDs may require you to have a minimum amount to open an account, depending on the fund’s performance and benefits. This can sometimes range between $500 to $1,000. However, some accounts could be upwards of $10,000 or more.

Likewise, money market accounts may have minimum balance requirements that you will need to maintain in order to keep a higher interest rate.

The Bottom Line

Opening a CD money market account may not seem like a big deal in the grand scheme of things. But these types of seemingly small financial decisions ultimately matter in the long run. After all, financial planning is nothing more than a series of decisions, which over 20 or 30 years can add up big time.

Fortunately, you can’t really lose money very easily when investing in money market accounts or CDs. For example, if you make a questionable choice — like locking your money into a CD with a low interest rate for a long period of time — you can probably still reach target savings goals.

The main thing to consider is that you could rob yourself out of potential interest gains by doing this. And this could hurt in the long run.

As a rule of thumb, look for the best short-term CD rates and money market accounts with high percentage yields and you will be fine. But always ask yourself whether it’s possible to get a better return before locking your money up for an extended period of time.

Also, there is no shame about using a financial advisor to help make these types of decisions. If you feel that you’re in over your head and struggling to manage your personal finance, you are most definitely not alone. Consider working with a professional who can help steer you in the right direction. Just watch out for high fees if you decide to take this approach.

You know your financial situation better than anyone else. If one of these accounts appeals to your investment appetite, by all means, go for it. Here’s to making smart decisions on the road to financial independence.

Additional Disclosures: Millennial Money has partnered with CardRatings and creditcards.com for our coverage of credit card products. Millennial Money, CardRatings and creditcards.com may receive a commission from card issuers. This site does not include all financial companies or financial offers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities.

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