Money Market vs. CD: Which Is Better?

Growing your savings in a traditional savings account is challenging today because of low interest rates. However, there are other options. 

In this post, we look at money market vs. CD accounts as savings vehicles. The main difference is that certificates of deposit typically pay out higher rates of interest than money market deposits, but you have to lock your money away for a long time to qualify.

Certificate of Deposit vs. Money Market Definition

Money market accounts and certificates of deposit are types of deposits supported by the federal government. Both will provide you with a decent return on your investment, but what the better option is – a CD or money market account – depends on your personal circumstances. 

MMAs

Most money market accounts offer some access to your money and rates similar to regular savings accounts. Under most schemes, you can withdraw six times a month via withdrawal, debit card, draft, check, or electronic transfer.

ATM, telephone, and mail withdrawals and payments don’t count toward the limit.

The interest rate that you get with an MMA is subject to change over time. If interest rates across the rest of the economy go up, so too will the rates in your MMA.

Likewise, if they go down, your MMA rates will drop, too. 

MMAs are not the same as money market funds, which are a type of investment. Instead, they involve a promise by the lender to pay you for a deposit, similar to savings accounts.

CDs

CDs are a unique type of savings account that require you to keep funds in them for a set period before you can access interest payments. Account terms range from a minimum of six months to five years, and perhaps longer in some circumstances.

Once the account reaches the end of its life, it “matures,” and the bank pays you back the initial CD deposit you made, plus the promised interest. 

Therefore, the significant difference between money market accounts and CDs is that the latter pays more interest. To obtain this higher rate, you’ll need to agree to lock your money away for longer.

What’s more, unlike MMAs, CDs fix the rate they pay. Savers know precisely how much they’ll get at the end of the term. 

Pros and Cons of Money Market Accounts and CDs

In this section, we compare money markets and CDs’ pros and cons: 

Pros of CDs

• Higher interest rates: The main pro of CDs is that they pay a higher rate of interest. Accounts with more than $100,000 in them, for instance, can earn an average of 0.39% over six months and perhaps as high as 0.86% over a 36-month period. 
• Greater predictability: Unlike the stock and bond market, which are highly volatile, the amount of interest CDs pay is perfectly predictable. Once the interest rate is set, you know precisely the amount of money you’ll receive at the end of the term.
• Lower risk: While CDs depend on the solvency of the underlying institution, they’re also backed by the Federal Deposit Insurance Corporation or National Credit Union Administration insurance. This means that even if the underlying entity can’t service the debt owed to you at maturity, public financial agencies can.
• Flexibility: CDs let you choose between various term lengths. On the low end, you can allow your CD to run for six months and, on the high end, for 60 months or more.
• Easy to avoid spending: By locking away money, CDs shield you from temptation. 

Cons of CDs

• Minimums: Whether you invest in a CD or money market largely depends on your total supply of capital. Most CDs come with annoying minimum deposit amounts, and sometimes these can be quite steep – often about $10,000. What’s more, if you want to get a better interest rate, you may need to make higher initial deposits.
• Limitations on withdrawals: When choosing between a money market or CD, ask yourself whether you can afford to wait until the maturity date. You won’t be able to take out money until then. 
• Penalties: If you attempt to liberate cash before the certificate of deposit comes to term, you may have to pay substantial penalties for the withdrawal. 
• Dishonesty: Lastly, some CD providers are known by FINRA and others to promote teaser rates that the vast majority of customers will never be able to access. CD and money market rates are different, but they shouldn’t be enormous. If a CD provider quotes a rate that seems too good to be true, it probably is. 

Pros of MMAs

• Higher earnings than conventional savings accounts: In 2019, the average rate of interest paid into conventional savings accounts was just 0.18% for deposits under $100,000. Most MMAs pay significantly more than this, particularly when the underlying federal funds rate is higher.
• Low risk: MMAs, like CDs, are insured by either FDIC or NCUA. Therefore, if the underlying financial institution goes into liquidation, you can protect your money from creditors up to $250,000.
• Flexibility: Finally, if you’re choosing between a CD or money market account, then the latter may offer you more flexibility. With a money market account, you can withdraw funds multiple times per month through selected channels and as many times as you like via ATM. 

Cons of MMAs

• Minimums: Both CD and money market accounts require you to deposit certain minimums before you can open them. Generally, MMA minimums tend to be lower than CD minimums, but they can still be substantial for new savers.
• Unpredictable returns: The big difference between CD and money market accounts is that the latter provides an unpredictable rate of interest. The returns your account produces depend on the underlying interest rate, which changes all the time. If rates across the general economy go down, so will your returns.
• Limited access: While limits on money market accounts are not as severe as they are on CDs, they still exist. For instance, you can only withdraw money or make payments six times per month via check, electronic transfer, debit card, or credit card. Interestingly, though, you can make unlimited phone payments or ATM withdrawals, making MMAs similar to regular savings accounts. 

Where Can You Get a CD or Money Market Account?

Both banks and credit unions offer MMAs and CDs. You may find that your current bank offers these services and is prepared to pay you reasonable rates.

Generally speaking, you tend to get better rates on both MMAs and CDs when you go online. Since internet banks have lower overheads than their brick-and-mortar rivals, they can pay you higher interest on your deposits. 

Money Market vs. CD: Wrapping Up

If you’re looking for a high-interest-bearing account that’s similar to a regular savings account, then MMAs might be the best option for you. However, if it’s a decent rate of return you’re after, then CDs are the better choice. 

Please note, though, that both CDs and money market accounts provide low rates of interest compared to investing in equities. The reason for this is the risk-reward ratio.

MMAs and CDs are low-risk investments, so the return is lower than you can get elsewhere.