The Differences Between CDs and Money Market Accounts

Your financial goals will help you choose the right investment path.

Your financial goals will help you choose the right investment path.

Certificates of deposit (CDs) or money markets offer a step up from traditional savings accounts. Not only are they government-insured, making them a relatively safe place to park your cash, but both offer higher interest rates than the average bank savings account. That's about all these two have in common, however. Your savings goals, ability to access your money, investment risk and other factors will determine which product is the better route for you.

Your Seed Money

The amount of money you have to invest is an important consideration for either investment option. The amount needed to purchase a certificate of deposit varies depending on the type and lender. A survey of banks at bankrate.com show minimum deposits ranging from $500 to $10,000. Some banks offer CDs with no minimum required to open the account; however, the CD itself will only start earning interest when you add funds. If you are new to CDs, you may want to start with a relatively low amount, such as $100. Money market accounts are similar to checking or savings accounts and also vary in the minimum amount required to open. Most banks only require a modest $25 opening balance on a money market. However, be sure to read the fine print and understand terms. Some banks will charge a service fee if your daily balance drops below a certain amount, such as $5,000, although the bank may make an exception if your money market account is linked to your other accounts with the bank.

The Complexity of CDs

Conventional certificates of deposit are time-driven, meaning you are agreeing to park your money for a specific period of time with the bank in return for a fixed rate of interest. Deposits can be left for as little as 30 days to 15 or even 20 years depending on the type of CD purchased. Callable CDs can have fixed or variable rates; however, unlike a traditional CD, the bank has the option to redeem the CD before maturity if interest rates go down. The good news is you get your money back with interest earned. The bad news is you now have to find a new investment for your money at a lower interest rate than you were earning before your CD was called. Because of their risk, callable CDs are typically 0.5 percent to 1 percent higher than regular CDs. Variable or ladder CDs offer a wide-range of investment options and enticing introductory rates. Some variable rate CDs offer a "bump-up" option that allows you to take advantage of an increase in interest rates during a specific period of time within the term of your CD. Others have a preset schedule of when this will occur, and so your interest rate may increase or decrease depending on market conditions.

The More Low-Key Money Market

Scratching your head after reading about CDs and not sure you like the idea of locking in your money for a set period of time? Money market accounts are often referred to as "high-yield" savings accounts, which means the interest rate may be slightly higher so you make more money over the same period of time. Generally, the more you have in your money market account, the better the rate the bank will give you. Keep in mind interest rates on money markets are variable, so your earnings will fluctuate with market conditions. However, most money markets compound interest daily and pay monthly, which generally enables you to grow your money at a faster rate.

Access to Your Money

Without question, the biggest difference between these two is accessibility to your money. Think about your investment goals. Are you looking to save for a future car or home purchase? If so, a CD may offer you better long-term earning potential. For short-term savings, especially for the emergency-fund scenarios such as a broken water heater, a money market may make more sense. If going the CD route, read the fine print carefully and understand all its terms and conditions. Once purchased, your deposit is locked in until maturity. You'll incur a hefty penalty from the bank for early withdrawal, ranging anywhere from six months' to as much as two years' interest. This is where money markets have some attractive features you can't get with a CD. You can freely access your money market account through withdrawal privileges, which may include check writing, debit cards or ATM use. Access fees may be assessed if you go over the allowable number of monthly transactions. However, deposits into a money market account are unlimited, so you can continue growing your savings indefinitely.

About the Author

Courtney Kreuzwiesner has more than 15 years of experience working in the public relations and communications fields. She has written on home improvement, money management and issues related to public health and wellness, such as disease prevention, nutrition and alternative medicine. Kreuzwiesner holds a Bachelor of Arts in journalism from Arizona State University.

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