When it comes to building savings, both CDs and money market accounts offer safe, easy ways to get started, but which one is better for helping you achieve your financial goals now and in the future?
First, we take a close look at how saving and earning interest works with a CD vs. a money market account. Then we’ll consider some of the key differences between these banking products and examine which one might work better for different types of savers.
Ready to get the CD vs. money market skinny? Then read on!
WHAT IS A MONEY MARKET ACCOUNT?
A money market account is a deposit account that offers a higher interest rate on balances than most conventional checking or savings accounts.
A money market account can limit how often you can withdraw money in a given month. By keeping more of your money on hand, your bank or credit union can pay dividends at a higher annual percentage yield (APY) on money market deposits.
WHAT IS A CD?
A certificate of deposit, or CD, lets you invest money you do not currently need access to for a predetermined period (or term) of between three months to five years. In return, you are paid interest at a fixed rate or APY, with dividends paid and reinvested at predetermined intervals. The longer your term, the higher the APY you will be offered.
CDs are also among the safest investments you can make, with both your principal and earnings fully insured by the federal government. This allows your money to earn higher interest than on other types of deposit accounts but with almost zero risk of losing your money.
However, your money remains inaccessible for the length of the CD term, unless you are willing to pay a steep penalty to withdraw it.
MONEY MARKET VS. CD: THE DIFFERENCES
While both money markets and CDs are considered savings accounts, they work in quite different ways and with different results. Here are some key ways in which they differ:
The major difference between money market accounts and CDs is how easily you can access your money. Money market accounts are known as liquid accounts, meaning you can tap your funds as needed (often within limits). Many banks and credit unions restrict access to not more than six withdrawals a month.
Meanwhile, money invested in a CD is meant to be off-limits until the end of the term. Most accounts will charge a hefty penalty if you withdraw cash before the certificate’s term matures.
Money market accounts are designed to offer much of the convenience of a regular savings account, but because your money needs to be readily available, rates are often only slightly higher than regular savings accounts.
By committing to invest your money in a CD for a fixed period, however, you allow your bank or credit union to lend the same cash out at a higher rate, allowing it to earn more interest, some of which it shares with you as higher dividends.
Rates vary from being broadly comparable to money market APYs to significantly more. While the actual dividend you earn depends on how your daily rate is compounded and reinvested, the longer you can leave your money in a CD, the more you will earn.
Money market accounts are deposit accounts that are designed to stay open indefinitely, so there is no limit to how long your money can remain invested in order to earn interest. That said, compounded dividends on accounts including Wasatch Peaks’s Money Market Savings Account are paid monthly.
CDs are offered with a wide range of terms, typically between three months to five years. Dividends are paid regularly and reinvested until the certificate matures. Some CDs also allow you the option to reinvest your principal and earnings in a new certificate following maturity.
Minimum balances for money market accounts and CDs also vary widely and depend on the investment aims of the account.
In general, money market accounts require smaller opening deposits and minimum balances than most certificate accounts. At the same time, some accounts may not pay interest on deposits below a certain level. Wasatch Peaks Credit Union’s Money Market Savings Account offers returns on every cent you invest.
In general, you usually need to deposit larger amounts to open a CD, and once deposited, this amount is unavailable until the certificate matures. In that time, you’ll earn interest on all the money in your CD at a fixed, predetermined rate. Wasatch Peaks offers a wide range of CDs with a minimum investment of $500.
PENALTIES AND FEES
Money market accounts are deposit accounts that remain open indefinitely. You’ll pay no penalties for the predetermined number of withdrawals you’re entitled to, but you are likely to face fees for overdrawing your account. Accounts may also charge a monthly or annual maintenance fee, but for most institutions, this is very low or waived altogether.
CD accounts generally charge far fewer fees, but penalties for withdrawing your money before the end of the certificate term are usually pretty steep.
Both CDs and money market accounts are fully insured up to a total of $250,000 per account by the FDIC (for banks) or NCUA (for credit unions). This is exactly the same level of insurance enjoyed by your regular checking or saving account. For CDs, this insurance covers both your originally invested amounts plus earnings from interest.
These safeguards make both money market accounts and CDs among the safest ways to invest money while still earning significant interest that allows your savings to grow.
WHEN TO USE A MONEY MARKET ACCOUNT
Money market accounts prioritize flexibility and convenience over earnings. That makes them a great place to set money aside from your budget but not so good for growing your nest egg. Here’s when choosing a money market account makes sense:
1. YOU’RE JUST STARTING OUT
You’ve just started working and making ends meet is a struggle. You need a separate place to stash any extra cash, but you never know when you might need it to balance the books. A money market account offers minimal interest, but you can access your money using a card, check, or online banking tools a certain number of times a month.
2. YOU’RE BUILDING AN EMERGENCY FUND
The first step to saving is having enough money set aside to prevent you from being knocked off course by unforeseen events. A money market account allows you to set money aside and access it instantly in case of an emergency.
3. HOLDING PATTERN
Let’s say you’ve inherited or received a lump sum of money or cashed out an investment and want a place to keep your money separate from your day-to-day finances. Wasatch Peaks’ Money Market Savings Account pays more interest the more you deposit, so you can keep earning until you might need to tap into the funds for a special expense like tuition.
WHEN NOT TO USE A MONEY MARKET ACCOUNT
That said, a money market account does not make sense if you think you’ll need to access your money more than usual. You will not earn significant interest if your balance is constantly fluctuating or you are paying penalties for extra withdrawals.
It’s also not ideal if you deposit money and then do not touch it for months or even years. While you will earn some interest, if you do not need access to your money regularly, you can grow your investment faster by putting it into a CD at no extra risk.
WHEN TO USE A CD
CDs are all about patience and growth. That makes them a great place to put money when you’re looking ahead to what’s next. Here’s when choosing a CD makes the most sense:
1. YOU HAVE A PLAN
Are you saving for something special, like a new pair of skis, a vacation with friends, or a down payment on a new car? If you’re saving for a goal then a CD can help make it a reality by keeping your money safely out of reach while it earns some serious interest. And, you’ll know exactly how much money you’ll be getting back and when.
Savings for something really serious, like a wedding ring? Consider Wasatch Peaks’ Dedicated Saver Certificates. Choose from a range of high-interest CD terms and arrange to have as little as $10 transferred automatically from your account each month. Now that’s commitment.
2. YOU NEED STRUCTURE
Let’s say saving is not going as well as planned and a money market account is just a little too accessible. A Wasatch Peaks Flex Certificate offers money market convenience with a few more guard rails. You can start with as little as $50 and deposit anytime you like up to $10,000 per month and $100,000 per year.
Your money will be safe, will earn decent interest, and you can withdraw what you need during the first three business days of every quarter. It’s a smart way to build better saving habits.
3. YOU NEED A STEPPING STONE
You’ve done the hard work of starting a savings nest egg but are not ready to commit to a long-term investment like a retirement or college savings account. In this case, the right CD offers a safe, high-interest stepping stone to the future.
4. YOU’RE PASSING IT ON
Want to do something great for your kids? Open a CD with as little as $500 and reinvest the money as it matures until you’re ready to pass it on. There’s no risk or complex investment decisions and your child will receive the benefit of your foresight and financial discipline with a nice lump sum to spend on college, a car, or something else.
WHEN NOT TO USE A CD
Conversely, you should avoid investing in a CD if you do not have a clear savings plan in mind or a working household budget. If there is any chance you might need cash unexpectedly then you are better off keeping your funds in a money market account.
If you are lucky enough to have more than $250,000 to invest, a CD will still offer valuable returns. But remember that the money over $250,000 will not be fully insured.
OPENING A CD OR MONEY MARKET ACCOUNT
Now that you know which savings product is right for you, it’s time to take it to the bank—or, even better, the credit union. While money market accounts are widely available at almost any financial institution, there are good reasons why local credit unions are often your best friend when you’re starting out saving money. Here are a few of them:
1. BETTER RATES
Credit unions are not-for-profit organizations owned by their members. Unlike commercial banks, we’re here to help out our members, not chase profit targets for shareholders. That allows us to pay more interest on your savings and charge lower fees than the big banks.
2. BETTER SERVICE
Credit unions like Wasatch Peaks know we can only prosper when our members thrive. That’s why we take the time to understand your needs and financial goals. Not sure if a money market or CD account is right for where you are now on your financial journey? Just ask us.
3. LOCAL CONNECTIONS
Credit unions were born in the community you call home. We offer neighborhood branches, friendly staff, and unrivaled knowledge about the local economy and housing markets. Like you, we are interested in putting down roots and building financial resources and relationships that last a lifetime.
WASATCH PEAKS: YOUR FRONT RANGE FUTURE
Wasatch Peaks Credit Union was founded in 1930 by U.S. Postal Service and Forest Service workers in Ogden. Since then we’ve grown up like our town has, adding members as northern Utah’s burgeoning business hub has expanded across Weber, Davis, and Morgan Counties.
Today, we’re proud to be part of a vibrant Front Range community that works hard, plays hard, and has the smiles to prove it. You’re as likely to find us tackling the single track in Wheeler Creek or wetting a line in Pineview Reservoir as sitting behind a desk. But whichever branch you visit, you’ll get the same friendly northern Utah welcome.
Contact us today or click below to learn more about getting started with our convenient, flexible money market accounts.