When it comes to putting money into savings, there are more than a few options to consider. Historically, most of us have just found a savings account to do the trick. They're secure and typically connected to your checking account, so why not?
The problem is, interest rates are meager compared to other options - such as a CD or a Money Market Account.
A CD offers you a fixed interest rate in exchange for "locking your money up" for a set period. A MMA is more flexible and is like a hybrid between checking and savings (which I'll touch on more below).
| CDs | MMAs | |
|---|---|---|
| FDIC-Insured | ✓ | ✓ |
| Earns Interest | ✓ | ✓ |
| Fixed APY | ✓ | ✗ |
| Potential for Higher APY | ✓ | ✗ |
| ATM Access | ✗ | ✓ |
| Debit Card | ✗ | ✓ |
| Check Writing Ability | ✗ | ✓ |
| Add to Your Balance | ✗ | ✓ |
| Withdrawal Limits | ✗ | ✓ |
| Withdrawal Penalties | ✓ | ✗ |
In this article, I am going to compare and contrast the two. Let’s start with CDs.
Easier to cut spending - CDs
CDs - Certificates of Deposit - are deposit accounts that require you to have your money in the account for a specific amount of time. You can choose a variety of CD term lengths when buying one, and some even allow you to pull your money out early (for a fee, of course).
Most banks will offer CDs anywhere from three months to five years in length. After opening an account and making your initial deposit, your money is held for that time. You can't draw on it (without a penalty) or add to it, in most cases (though some banks now allow you to add to your CD once or twice during the term).
All this is to say that CDs, while providing a nice APY, are extremely illiquid - meaning you cannot easily access your money.
The idea behind this is pretty simple. Banks want to ensure your money is locked up so they can use it for other purposes - such as investing or lending to others. It allows them to plan a bit, so when your CD matures, you'll get your money back plus interest.
Think of it as a loan to a family member (only, you get interest).
And remember, if you want to tap into those funds before the CD matures, you'll probably pay a penalty - which, in most cases, negates the benefit of the CD, to begin with.
If you're going with a CD, it's wise to plan on not touching that money for a while.
One final note on CDs is that they can tend to require high minimum deposits. While some banks have a $0 minimum, many big banks require at least $2,500 to open a CD.
Easier access to your money - MMAs
MMAs are a reliable option for saving money - assuming you can still find one. Like I said above, I consider them a blend between a checking and savings account.
Some MMAs tend to earn similar interest rates to high-yield savings accounts. Most MMAs will have a better rate than your average savings account with your ordinary traditional bank.
Besides having a good APY, MMAs will usually give you the ability to write checks and have a debit/ATM card for drawing on the money in the account. Not all MMAs do this, however, so make sure to read the fine print.
That said, MMAs don't have quite the same level of flexibility a typical checking account does, though. Like a savings account, a money market account (by law) limits you to only six transfers or withdrawals every statement cycle (which is usually per month).
This is a huge downside if you're someone who wants to draw on that money frequently.
Another potential downside to a money market account is the account minimum. Many MMAs will provide you a better rate only if your minimum deposit is higher. While many MMAs now have a $100 minimum (such as First Internet Bank), some accounts require as much as $5,000 (like BMO Harris) as a minimum opening deposit to access a higher rate.
So Which Is Better - a CD or an MMA?
It's challenging to compare CDs with MMAs since they have different guidelines, structures, uses, and ideal customers. That said, they're both savings vehicles, so let's take a look at which one might be ideal.
If you want to access your money often, an MMA is going to be the better choice since CDs require you to lock your money in for a set term. As I said above, MMAs will almost always allow you to withdraw funds through bank transfers, checks, or a debit card.
Just remember that these withdrawals mirror the regulations of a savings account - so you can only withdraw money six times during a billing cycle.
If you want to limit access to your money for whatever reason (i.e., trying to spend less or maybe you don't need that money for a while), a CD is a great option. After your initial deposit is made into the CD, you have to leave it there until it matures, unless you want to pay a fee (which in most cases erases the benefit of the APY you'd earn).
However, as I said, a CD is an excellent mechanism for reducing spending -- especially for those who tend to draw on their savings accounts for additional expenditures when they need it. While a money market account allows you up to six transfers a month, that may be too much for someone who spends a lot -- versus a CD that will keep your money locked away so you can't touch it.
With APYs, you will often see very similar rates on both products now, especially if you look around enough. Compared to a traditional savings account, both of these options will likely beat the measly rate you'd get there (the national average ranges from around 0.10% to 0.20% on savings accounts).
Between the two, long-term CDs can provide a better APY due to the limited flexibility, but not always, so it's smart to shop around. If you're looking for a consistent rate for a more extended period, yet still want some flexibility, you can do a CD ladder and have a blend of both MMAs and CDs.
Bottom Line
Both of these products are great options for saving money, but each is going to cater to a different type of person with a different savings strategy. So it's hard to say one is better than the other directly - they're just different.
A money market account is ideal for someone who needs flexibility, wants to write checks and wants to access cash, or use a debit card. Because of this flexibility, I'd also say an MMA is right for someone who can confidently manage their spending.
CDs, alternatively, provide an excellent way to save your money, get a good APY, and not worry about touching those funds for a while. Unlike an MMA, it protects you against the ability to take that money out and spend it quickly. The upside, though, is that your money can grow over a more extended period.
