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Both money market accounts (MMAs) and certificates of deposit (CDs) can be advantageous financial tools to build savings and reach financial goals sooner. However, the accounts operate quite differently. Comparing a money market vs. a CD account, you might wonder if one is better for your savings goals than the other. The answer depends on your specific goals and how quickly you need your assets to be converted into ready cash.
In this article, we’ll discuss how each savings vehicle works and how to differentiate their benefits. Understanding these differences will help you choose which one works best for your lifestyle and unique financial goals.
What Is a Money Market Account?
A money market account is a type of interest-bearing savings account typically offered through credit unions or banks. Though similar to a traditional savings account in some ways, MMAs usually offer higher interest rates than most savings accounts and occasional checking account options. They can be a powerful tool for saving money faster. Since they can accrue interest at a higher rate, they typically require a higher minimum deposit and may require a minimum balance to earn the highest rate or avoid monthly service charges.
MMAs have variable interest rates. This means the rates fluctuate depending on the overall interest rate market. Some months, your rate of return will not remain the same, it will change each month. If you can work with a variable rate, you have the potential to earn a higher rate on your money. The bottom line is that MMAs are a great investment tool for greater liquidity when interest rates are on the rise.
The specific terms of your MMA will depend on the financial institution you choose to bank with, so make sure to shop around and select the rates and terms that work best for your savings goals.
How Does a Money Market Account Work?
Money market accounts function similarly to traditional savings accounts, although most MMAs come with debit card and check writing privileges, so you can access your money when you need it the most. Keep in mind that many also limit the number of transactions you’re allowed each month. Make deposits and earn interest on your account balance and have access to your funds when you need them. If you don’t foresee needing to transfer money more than six
What Is a Certificate of Deposit?
A certificate of deposit is another type of interest-bearing account. However, with CDs, your money is deposited as a lump sum and is held for a fixed period of time. CDs differ from traditional savings accounts as the money must remain untouched for the agreed-upon term to avoid early withdrawal penalties. Though the term lengths vary depending on where you choose to bank, you usually can choose from as few as 4 months or as many as 18 months. Typically, the longer the term length the higher the interest rate.
CDs are ideal for people who know they will need to make a big purchase in the future. Safely lock money away for a period of time, and in exchange for leaving your money untouched, you can earn some of the best interest rates. Exchange accessibility of your funds for higher rates than MMAs.
Certificates of deposits earn interest at a fixed rate, so your rate and return are guaranteed. You’ll know exactly how much you’re earning each month. If the overall market interest rate drops, your higher rate is locked in.
How Does a Certificate of Deposit Work?
Certificates of deposits are timed deposits that earn fixed interest until they reach maturity. Keep your lump-sum deposit within the account term length and then withdraw your money, plus interest, penalty-free.
CDs are ideal for both short-term and long-term saving. Choose your term length based on your saving objective. Are you saving for a child’s education or a downpayment on a house? Are you building an emergency fund? Or are you looking to put money aside for a new addition to the family or a wedding? No matter your goal, select a term length that aligns with how soon or far off in the future you need your money.
Money Market vs. CD: Which Is Better?
How do you know if a money market vs. a CD account is right for you? It’s important to look at your budget, lifestyle, and savings goals. Deciding which one is right for you depends on what you are saving for, how soon you need the money, and how often you need access to your funds.
Both options are safe places to keep large sums of money; the FDIC protects your funds up to $250,000. Grow your money faster with little risk.
When Might an MMA Be a Better Choice?
- You value accessibility and need the flexibility of adding and withdrawing money regularly.
- You prefer easy access to money with debit card and check-writing privileges.
- You want greater liquidity.
- You don’t want to risk early withdrawal penalties.
- Interest rates are predicted to rise.
When Might a CD Be Ideal?
- You prefer to set aside a lump sum without the risk of spending. With MMAs, easy access to funds may encourage spending money, making it harder to save.
- You are saving for a big-ticket purchase in the future.
- You want the highest potential return and can exchange accessibility for a higher interest rate.
- You want to minimize risk and avoid variable interest.
- Interest rates are predicted to drop, and you want to lock in your rate.
Grow your savings faster with Riverview Bank’s guaranteed CD rates or our convenient money market accounts. We want to help you get the most out of your money. Open an account today for competitive rates and flexible terms. The future is yours!