Is a Certificate of Deposit Better than a Money Market Account?
If you’re looking for ways to earn higher interest on your savings, Certificates of Deposit (CDs) and Money Markets are both great options in different ways!But which one is better? It all depends on what you're looking for... If you want to earn a higher interest rate, a CD is a way to go. But if you need access to your cash more quickly, a Money Market might be the better option. Both types of savings have their benefits and drawbacks, but one may benefit you more than the other.
here's a quick overview of what we’ll cover
what is a certificate of deposit (cd)?
A CD is a type of savings account that offers a higher interest rate than regular savings accounts. They work by having you deposit a certain amount of money into the account for a set period of time; after which, you can either withdraw your money without penalty or renew your CD for another fixed duration.
CDs are offered with various terms – typically ranging from 6 months to 5 years. Additionally, most CDs also require a minimum deposit amount before you are eligible to open one, though this amount will vary depending on the financial institution. Overall, if you are looking to earn some extra interest while keeping your savings secure, then a certificate of deposit is an excellent option to consider.
If you want a more detailed look at what CDs are? I have just the thing for you.
what is a money market?
A money market account, on the other hand, is a different type of savings account that also offers a higher interest rate compared to a standard savings account. There are also minimum balance requirements to open a Money Market, but the key difference between this type of account and a CD is you can access your savings at any point (as long as you keep the minimum requirement)
QUICK TIP: If you come across a money market fund, just know that it’s not the same as a money market account. Money market funds are managed by professional investors and aren’t insured by the FDIC or NCUA. Here’s some more info on money market funds. Check it out>
how do cd rates compare to money market rates?
There is a significant difference between CD rates and money market rates, since CDs typically offer higher returns but with greater restrictions and penalties for early withdrawals. Both CD and money market rates are determined in large part by the interest rate environment at any given time.
In general, interest rates tend to go up during periods of economic growth and down during times of recession or market uncertainty. Meaning, CD rates will change depending on fluctuations in the broader economy. However, once you open a CD account, the interest rate will not change until your term is up and you have the option to withdrawal or renew.
Overall, it is important to evaluate both CDs and money market rates before making a decision about where to keep your money.
QUICK TIP: Here’s a look at Skyla's CD and money market interest rates so you know what kind of return you could be receiving for your account. Psst… If you haven’t looked at certificate of deposit 101 yet, keep in mind there are different types of CDs out there. There's Jumbo CDs, IRA CDs, Traditional CDs (at Skyla, we simply call it regular CD accounts) and more. Check out Skyla’s rates >
what are the benefits and risks of a cd account vs. a money market?
benefits and risks of a cd
- CDs are safe when purchased through a NCUA or FDIC insured credit union or bank.
- CDs offer a higher interest rate than regular savings accounts. This means that your money will grow faster in a CD than it would just sitting in a savings account. And since CDs typically have longer terms than savings accounts, you can end up earning a lot more money in interest over time.
- No monthly maintenance fees. Some financial institutions charge fees for having a savings or money market account. You wouldn't have to worry about that with a CD. Woo-hoo, you get to keep the interest you earn (all of it). Just don’t withdraw your funds before it matures or else you’ll get hit with fees.
- Guaranteed returns. When you invest your money for a predetermined period of time, you'll earn interest on the money that you have deposited, ensuring a predictable return on your initial investment.
For example, say you open a five-year (60-month) Regular CD with $6,000 and earn a 4.00% APY. At the end of your CD term, you’d have $7,300 and change. If you’re saving for a long-term goal that has a specific end date, you can tailor your choice of CD terms and interest rates to help you meet your goal.
Here's a CD calculator so you can see how much your CD could be worth.
- Have to wait to use to access funds. With CDs the requirement for many institutions is that you have to wait until your funds mature before you can access it.
- Your money will be inaccessible for a certain period of time. Meaning that you won't be able to access it in the event of an emergency.
Also, many people find that having their savings held up over long periods of time can be limiting and make it more difficult to achieve their financial goals.
- Interest rate may not grow. There's always the risk that your rates are low and there won't be a great return of funds.
benefits and risks of a money market
Money Market BENEFITS
- Can access your money often times out of the month. Unlike certificate of deposit accounts where you're limited to accessing your money until it matures.
- Offer higher interest rates than regular savings accounts. This means that your money will grow more quickly over time, helping it to keep pace with inflation.
QUICK TIP: Want to see how high Skyla's interest rates are on a money market account versus other checking and savings account offered at the credit union? Check it out here >
- Can offer stability. This is by maintaining an established interest rate that does not fluctuate unpredictably. By keeping money in this type of account, you know exactly how much your money will grow over time, making money market accounts a great option for those who want to invest their money but also need some degree of certainty.
Money Market risks
- High minimum deposit or balance requirement. This may be higher than what's required for a checking or savings account depending on the financial institution. Money market accounts often come with minimum balance requirements, or limits on the amount of money that can be deposited at one time, which may not work for people who want to save up a substantial sum of money.
- Transaction restrictions Even though you can access and withdraw funds from the account, many financial institutions typically allow a certain number of purchases and transfers each month (typically 6), which may not be appealing if you need quick access to your funds more often. Psst... If you do more than 6 transactions per month, financial institutions could charge a fee. The fee could be anywhere from $5 or $10 and up.
- Interest rates won't stay the same. Interest rates for an MMA may vary depending on the overall market's interest rates. This can mean you'll earn less interest. Psst... interest rates can rise as well but you can't predict what may happen with market rates.
when is it best to get a cd or a money market account?
There is no definitive answer to the question of whether it is better to use a CD or a money market account, since the right option will depend on your individual financial situation and goals. However, here are some key factors to consider when deciding between these two types of investment accounts:
Ultimately, the most important thing is to find an investment strategy that matches your needs and allows you to achieve your long-term financial goals.
- What are your money goals?
- What’s the minimum deposit requirement?
- How soon do you need access to your savings?
- Can you afford and are you comfortable with paying any penalties if withdrawing funds from account sooner? What are the penalties?
Deciding whether to get a CD or money market account really comes down to what your goals are and how much risk you're willing to take. If you want higher interest rates and can afford to tie up your money for a fixed period of time, then a CD is a good option for you.
However, if you need more flexibility with your funds or want immediate access to your cash, then a money market may be the better choice. Whichever account you decide on, we can help you open one that meets your needs.
Any of the wonderful staff at your local Skyla branch will be more than happy to help! Not near a branch or short on time? Then simply send us an email or give us a call at 704.375.0183, or open your account online.
As the Content Specialist and author of the Learning & Guidance Center, Yanna enjoys motivating others by uncovering all that's possible in the world of finance. From financial tips and tricks to ultimate guides and comparison charts, she is obsessed with finding ways to help readers excel in their journey towards financial freedom.
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