Money market vs. certificate of deposit (CD): Where should I invest?
Editorial staff, J.P. Morgan Wealth Management
- Money market accounts (MMAs) may offer higher interest rates than regular savings accounts but with similar flexibility.
- Certificates of deposit (CDs) offer high (usually fixed) interest rates in exchange for securing your money for a set term.
- Deciding where to invest will depend on your circumstances and financial goals.
If you're new to saving money, one of the unwritten rules you'll discover is that you should make your money work for you. In other words, it pays to save your money in an account that earns interest on the principal balance. The question is: Which type of account is best for you?
Two popular alternatives to traditional savings accounts are money market accounts (MMAs) and certificates of deposit (CDs). Although both investment vehicles allow you to earn interest, they actually differ when it comes to withdrawal flexibility and other account features.
To help you choose the best product for your financial goals, here’s what you need to know when it comes to the MMA versus CD debate.
What is the difference between MMAs and CDs?
While MMAs and CDs are both known savings tools, they have several differences worth noting.
Money market account (MMA) | Certificate of deposit (CD) |
|---|---|
What is its ideal usage? | |
MMAs are ideal for easy access and/or short-term investments (e.g., an emergency fund). | CDs are ideal for long-term investments you won’t need to touch for a while (e.g., to save for a down payment on a home). |
How high is the interest rate? | |
MMA interest rates are variable and historically higher than traditional savings accounts, even though they’re comparable at the moment. | CD interest rates are typically higher than savings accounts or MMAs and at a fixed rate depending on which term you elect. |
Is it insured? | |
Yes, MMAs are insured up to $250,000 per depositor by the Federal Deposit Insurance Corporation (FDIC) for banks or the NCUA (National Credit Union Administration) for credit unions. | Yes, CDs are insured up to $250,000 per depositor by the FDIC for banks or the NCUA for credit unions. |
Can you add money to the account? | |
Yes. | Yes, but only at the end of the CD term. |
Can you withdraw money? | |
Yes, usually up to six times per month. | Yes, but you will incur a penalty if it’s before the end of the agreed-upon term, with the exception of liquid CDs. |
When are fees incurred on the account? | |
Fees are incurred if you withdraw past the available dollar amount, exceed the monthly withdrawal limit or go below the minimum balance requirements. | Fees are incurred if you withdraw funds before the end of the term length. |
Now that you know the high-level differences between MMAs and CDs, it’s time to get into the details of each to help determine which one will best serve your financial needs.
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What is a MMA?
A MMA is a savings deposit that earns interest at a rate that the bank or credit union can change at any time after the account is opened. MMAs generally allow unlimited deposits and may permit a limited number of withdrawals or transfers, including check-writing capabilities, within an established time frame (e.g., per month or statement cycle). They may also allow account access via an ATM, debit card or in person at a branch of the financial institution.
Pros and cons of MMAs
To help you decide if an MMA is right for you, here’s a look at some of its pros and cons.
Pros
- Liquidity: Withdrawals may be made at any time.
- Overdraft protection: Automatic transfers can be established to provide overdraft protection for your checking, while your other funds continue to earn competitive rates.
- Competitive rates: In general, the annual percentage yield (APY) is higher than the APY on savings accounts. Some banks pay interest based on the balance in the account (i.e., the higher the balance, the higher the rate). However, it’s important to reiterate that MMA rates are currently comparable to traditional savings accounts, with some high-yield savings accounts edging out MMAs.
- Access to ATM cards: In some cases, banks or credit unions will give you an ATM card to access funds from your MMA.
- Money is insured: Funds in MMAs are insured up to $250,000 per depositor by the FDIC for bank accounts or the NCUA for credit unions accounts.
Cons
- Limit on transfers: The number of transfers, including check writing as applicable, per month or statement cycle may be limited. Any excess number of transfers may be subject to a fee.
- Variable rates: Rates are variable, meaning they can change at any time after the account is opened, depending on the current rate environment and market conditions.
- Balance requirements: You may be required to open the account with a high minimum deposit and/or maintain a minimum balance on the account to earn interest or to avoid monthly service fees. Be sure to check with your financial institution for specific terms.
What is a CD?
A CD is a time deposit account. This means that when you open a CD, your money is locked up for a specific term of your choice, anywhere from seven days to several years, depending on the terms offered by your financial institution. In exchange, your financial institution pays a fixed rate to guarantee the interest amount you will receive at the end of the term (the maturity date), making CDs a predictable investment. In general, longer-term CDs pay higher interest rates.
The main draw is that a CD earns interest at a fixed rate for the term of the account regardless of the rate environment during the term, so you don’t have to worry about rate fluctuations. In general, CD rates offer a higher APY than the rates for savings and money market accounts because you can’t make withdrawals before the account matures.
During the term of the CD, there are no rate fluctuations; that means you’ll know exactly how much your account will earn by the end of its term. The downside is that if you need to access the money before maturity, you’ll have to pay a significant penalty for early withdrawal.
In short, CDs are a secure way to save money and earn interest on the principal in the account with predictable returns. As always, please speak with a tax professional for any questions related to the taxable income from MMAs and CDs.
Pros and cons of a CD
Here’s a more detailed breakdown of the pros and cons of CDs to help you decide if it’s a good move for you.
Pros
- Competitive rates:
- Money is insured: Funds in CD accounts are insured up to $250,000 per depositor by the FDIC or NCUA.
- Predictable returns: In contrast with other investment vehicles, CDs offer predictable, guaranteed returns on the funds you put in. You set aside a specific amount of money at a fixed rate for a set amount of time, and you don’t have to worry about performance.
Cons
- Early withdrawal penalty: The money in a CD must stay locked up for a set period and can only be withdrawn at maturity; otherwise, you’ll incur a significant early withdrawal penalty.
- Renewals: Your bank may inform you when your CD term is about to mature with the exception of 30-day CDs or shorter. But if you somehow miss taking action at maturity, your account may automatically renew under the same term stipulations. This means that you cannot increase the deposit amounts or change to a new, different term once the renewed term begins. Be sure to review the renewal terms provided by your financial institution.
The bottom line
When deciding which savings method to go with, think about the benefits of each type and consider which one best aligns with your needs. Are you comfortable with setting aside money for a period of time to allow it to grow? If so, a CD may be a better investment. But if you prefer to have immediate access to your savings for unforeseen circumstances or needs, then an MMA may be a better fit.
Speaking with an advisor can help you split up your savings between an MMA and a CD account so you can potentially reap the benefits of both.
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Editorial staff, J.P. Morgan Wealth Management
