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CDs vs. money market accounts: Which one is better?

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Updated: January 16, 2024

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Certificates of deposit (CDs) and money market accounts are having a moment. With rates for both easily topping 5% – thanks in large part to the Fed’s recent history of hiking interest rates – savers have two easy ways to safely grow their cash. If you have targeted goals for a down payment on a new mortgage, college tuition or a dream vacation, CDs and money market accounts can get you there.

All you need – besides money, of course – is some patience to let your money grow.

But before you open that new CD or money market account, it’s important to consider the pros and cons. And with the Federal Reserve allowing rates to stabilize or even fall – which could prompt banks to start lowering  their account APYs – you may want to consider your options sooner rather than later.

Money market vs. CDs

Though their interest rate outcomes may look alike, CDs and money market accounts aren’t exactly identical twins. They cater to different financial needs and preferences.

CDs are time-bound savings instruments offered by banks. You invest a lump sum for a predetermined period, ranging from a few months to several years, at a fixed interest rate. The key advantage of CDs is the guaranteed return as the interest rate doesn’t change throughout the term. This makes CDs an attractive option for conservative investors seeking predictability vs. stock market volatility – especially with APYs pushing above 5% and, in some cases, 6%.

Keep in mind a common misconception about CDs: They don’t always offer the best interest rates for savings. While they typically offer higher rates than standard savings accounts, this isn't always the case, especially for short-term CDs. Moreover, the notion that your money is entirely locked away is a bit misleading. You can withdraw early, but you will incur a penalty, which could diminish your overall returns.

Money market accounts, on the other hand, are savings accounts with checking-account-style characteristics. Though their rates typically lag CDs, they lack the time commitment of CDs, offer higher interest rates than standard savings accounts and provide more liquidity in terms of check writing and fund transfers. This flexibility makes them suitable for emergency funds or short-term savings goals.

Money market accounts have their own perception problems: While they’re more liquid than CDs, some banks may still limit the number of withdrawals or transfers per month even though federal regulations have removed that requirement.

Additionally, interest rates on money market accounts can fluctuate, contrary to the belief that they always provide a steady, high return. The rates are often higher than regular savings accounts but can vary with market conditions.

Money market account definition

A money market account from a bank or credit union typically earns higher interest than a regular savings account and provides limited check-writing ability to access funds. They are FDIC-insured (or NCUA-insured for credit unions), which adds a layer of security to your investment.

CD definition

A CD is a time-bound deposit offered by financial institutions, with a fixed interest rate. CDs require you to lock in your money for a specified period, ranging from a few months to several years. Withdrawing funds before the maturity date can result in penalties. What you get in exchange for that time commitment is usually a better rate. CDs are known for their predictability and safety, as they are also FDIC or NCUA insured.

Main differences

The biggest differences between the two accounts come down to flexibility and time.

Money market accounts offer higher liquidity, allowing for easier access to funds. Typically, they come with check-writing privileges and limited transaction abilities. In contrast, CDs require you to lock in your money for a fixed term, and early withdrawals usually trigger penalties.

CDs generally offer higher interest rates compared to money market accounts as a reward for that fixed time investment. The interest rate on a CD is locked for the duration of the term and provides predictable returns. Money market accounts, while offering more flexibility, usually have variable interest rates that can change over time.

Finally, CDs are defined by term commitments that can range from three months to six years. Money markets, on the other hand, allow for ongoing deposits and withdrawals within the bank’s limits, putting you closer to you money, provided you can live with lower returns.

When to invest in a money market

Investing in a money market account is ideal when you’re seeking higher interest earnings than a regular savings account but need or want access to your funds. It suits short-term financial goals or an emergency fund, where liquidity is essential. Money market accounts are also a good choice if you prefer the convenience of check-writing and debit card access.

Money market accounts vs. money market funds

It's important to distinguish between money market accounts and money market funds, as they cater to different financial needs. Money market accounts are essentially FDIC-insured savings accounts with typically higher interest rates and limited transaction abilities. 

On the other hand, money market funds are investment products offered by investment firms and don’t have FDIC protections. They invest in short-term, high-credit-quality debt instruments – such as treasury securities or municipal bonds – and aim for stability and liquidity. While offering potential for higher returns, they also come with a greater risk compared to money market accounts.

When to invest in CDs

CDs are the better option when you’re ready to commit a lump sum that you won't need for a while and want a higher, guaranteed interest rate. They’re suitable for medium- to long-term financial goals, like saving for a down payment on a house or a child’s education. CDs can also be part of a diversified investment portfolio, providing a low-risk, fixed-income component.

When to invest in money market accounts

Investing in money market accounts makes sense when you need a combination of relatively higher interest earnings and quick access to funds – ideal for short-term financial goals or as a part of an emergency fund where liquidity is essential. Money market accounts are also suitable for individuals who seek a safe parking spot for their cash with a slightly better yield than traditional savings accounts.

Money market vs. CDs FAQs

  • Are CDs or money markets safer?

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    Both money market accounts and CDs offer high safety levels, especially if they are FDIC- or NCUA-insured, which protects your investment up to $250,000. The risk is virtually the same for both, making them solid choices for risk-averse investors. The one slight risk comes with money market accounts, whose rates can fluctuate even though they offer the limited ability to write checks against the funds.

  • Which account pays higher interest?

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    Generally, CDs offer higher interest rates compared to money market accounts. This is because money market accounts offer more liquidity, while CDs require you to commit your funds for a specific period, hence the higher interest as a trade-off for reduced access.

  • Is a money market account better than a savings account?

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    This depends on how much you may need your money – and when – after you open an account.

    Money market accounts often offer higher interest rates than regular savings accounts and provide more accessibility to funds, including check-writing abilities. However, they may require higher minimum balances, and bear in mind that no-penalty CDs are gathering momentum with competitive rates. Whether money market accounts are better likely comes down to how quickly you need access to your money.

  • Can CDs or money markets lose money?

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    The principal amounts in CDs and money market accounts are typically safe and doesn’t lose value, especially if they are within FDIC or NCUA insurance limits. But in a high-inflation environment, the real value or purchasing power of the money can decrease if the interest earned doesn’t keep up with inflation.

About our author

Chris Clark
Chris Clark, Freelance Contributor

Chris Clark is freelance contributor with MoneyWise, based in Kansas City, Mo. He has written for numerous publications and spent 18 years as a reporter and editor with The Associated Press.

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