Money Market Accounts vs. Savings Accounts vs. CDs

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Money market accounts, savings accounts and certificates of deposit (CDs) can give your savings a boost by earning interest, all while keeping your money safe.

Understanding how these interest-bearing deposit accounts work, and the differences among them, can help you make the best choice about where to save, and grow, your cash.

Differences between money market, savings accounts and CDs 

Here’s a helpful comparison of account features. You can see the differences between different types of deposit accounts you might see at a bank or credit union.

Money market account vs. CD

A money market account differs from a CD in that the money market account has checking account features, such as the ability to write checks from it. It may also come with a debit card. You are meant to use the money in an MMA as needed, when you need it (though some banks may impose a withdrawal limit of six times or so a month). And, crucially, money market accounts have variable APYs that can change at anytime. 

A CD, on the other hand, is a time-deposit account, meaning you leave the money in one for a set term and you also get a fixed APY for the length of the term, which generally range from one month to 10 years. It is the most restrictive of the three types of accounts. You usually have to pay an early withdrawal penalty if you withdraw money before the term is up (unless you have a no-penalty CD). Thus, CDs are geared more towards a “set it and forget it” savings strategy. 

Depending on the term of the CD, you can earn a higher APY than you would with a savings account or money market account.

Money market account vs. savings account

The primary differences between money market accounts and savings accounts is how you access your funds. 

Savings accounts are relatively flexible but usually don’t come with checkbooks and debit cards like money market accounts. Money market accounts are explicitly designed to give account holders an easier way to spend money in the account by providing things like debit cards, though not all MMAs do this. Both can be good places to stash your emergency funds.

Savings account vs. CD

As with money market accounts, savings accounts aren’t time-deposit accounts. You can make penalty-fee withdrawals, either unlimited or up to a certain amount as imposed by your bank. Moreover, savings accounts have variable annual percentage yields (APYs) — which can change at any time — whereas CDs offer fixed APYs.

Pros and cons of money market accounts, savings accounts and CDs

Money market account pros and cons

Pros

• You can find MMAs with high interest rates, and ones that pay a higher APY for bigger deposits.
• MMAs may come with check-writing privileges, ATM card or a debit card, giving you easier access to your funds.
• Your account is protected from loss at any federally insured bank or credit union.

Cons

• Potentially limited withdrawals
• You’re often required to keep a higher account minimum than with a savings account or even a CD.
• If you don’t meet the account minimum, there’s a chance you’ll be charged a monthly fee.

Savings account pros and cons

Pros

• Savings accounts at banks that are members of the Federal Deposit Insurance Corp. (FDIC), and credit unions that are members of the National Credit Union Administration (NCUA), are insured and highly liquid.
• Many great high-yield savings accounts come with no monthly fees.

Cons

• You may be limited to a certain amount of withdrawals per month.
• Compared to a checking or money market account, savings account funds are harder to “spend” because accounts usually don’t come with checks, debit or ATM cards.

Certificates of deposit (CDs) pros and cons

Pros

• Potentially higher interest than other savings vehicles.
• Fixed interest rate for the length of the CD term.
• As long as you don’t withdraw your money early, you won’t be hit with any fees.

Cons

• Your money is not accessible unless you make an early withdrawal and pay the appropriate fee.
• Pulling out money before the CD term is up will incur a penalty, which is usually some amount of interest but can eat into your principal.

How to choose the right account for your savings goals

Each of these accounts can help you save for different financial goals. You can use these accounts together to work toward your goals and maximize your earnings.

• Short-term goals: A savings account is a good fit for near-term plans, like planning a vacation, buying new furniture or setting cash aside for holiday spending. You’ll have easy access to your money when you need it, without worrying about penalties.
• Medium-term goals: Both money market and savings accounts are well-suited for medium-term goals. If you need steady access to cash for those goals — like putting deposits down ahead of a wedding — a money market account with checks or a debit card could be your best bet.   Both accounts are liquid enough that if you need to tap your funds earlier than you planned, there are no penalties for early withdrawals.
• Long-term goals: CDs make sense if you are saving for a goal that is several years off, such as buying a house, a new car or building a reserve for your child’s future education — especially if you have a big sum of money that you can afford not to touch for a long time. Plus, CDs have a fixed rate, so you need not worry about rate fluctuations.

Risks of using money market accounts, savings accounts and CDs

Although your money is protected from bank failures by FDIC insurance and from credit union failures by NCUA insurance, there are other risks to keep in mind as you consider these savings products:

• Inflation: The biggest risk you’re likely to encounter is inflation. As consumer prices increase, your yield may not keep up with inflation. While you won’t lose your principal, you could see an erosion of your purchasing power over time.
• Rate fluctuations: Some accounts are more sensitive to the macroeconomic environment. Yields on savings, money market accounts and CDs are based on market conditions. This is why it’s good to check on your APY every so often, and shop around if you find the yield doesn’t suit your needs anymore.   

With a CD, you have some protection from rate volatility because you lock in the rate for the term length of the CD. But if the CD matures during a low-rate environment, and you renew the CD, you’re stuck with a lower yield than you had before. You’ll also want to avoid an automatic renewal in that scenario.

Many investors choose to offset the inflation risk of these deposit accounts by having other investments, such as stocks.

Bottom Line

When it comes to saving and earning interest on your money, it’s important to understand the differences between money market accounts, savings accounts, and CDs. While all three offer a safe way to store your savings, they each have unique features and advantages. Money market accounts offer flexibility with check-writing and debit cards, savings accounts are more accessible and have lower fees, and CDs offer higher interest rates but with a commitment to keep your money locked away for a set period of time.

To make the best choice, consider your financial goals and situation. And remember, it’s always wise to diversify your savings and investments to protect against inflation. So, whether you’re saving for a short-term goal or building long-term wealth, understanding these deposit accounts can help you make the best decision for your financial future.