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CD or Money Market Account: Which Of Them Is Better For You?

Money market account (MMs) and CDs are very popular among solid investors. Which of them is the right investment for you?

You can trust the integrity of our unbiased, independent editorial staff. We may, however, receive compensation from the issuers of some products mentioned in this article. Our opinions are our own.

Table Of Content

Based on data obtained from St.Louis Fed data, the personal saving rate declined to 3.6% as the global financial crisis kicked in, but the saving rate rose to 6.4% in 2008 and peaked at 12% in 2012. However, the personal saving rate declined to 6.4%, and the rate remained sluggish until 2020, and it achieved a new high of 13.7%.Chart: Personal Saving Rate in the U.S. 2006-2020

What Is A Money Market Account?

If you’re looking for something that’s actually a bit of a mix between a savings account and a checking account you need a money market account.

These accounts have high interest, in most cases, higher than a savings account. Of course, different banks offer different things.

Other benefits include being able to write checks and even being able to get money through an ATM card. Because of this system, it’s easy to get the money that you need, when you need it.

It’s important to note that you won’t get this with every money market account, however. You may have to make requests to get the extras that you really want.

When Do You Need It?

Interest is one of the most important parts when it comes to saving money and with a money market, you can make more interest than with a savings account. What that means for you is that you can use a money market account for things that you want to do in the not-so-distant future, but not immediately.

Things like saving for a house can be done in a money market account because you’re probably going to need a few years to save and compared to a savings account you’ll get more money here.

It’s important to note that there are some rules and stipulations with these types of accounts, however. Banks generally require you to have a certain amount stored away in that money market account, whereas you don’t have a minimum for savings.

For some accounts, it could be just a couple hundred dollars but others may require upwards of several thousand dollars.

What Is A CD?

Have you heard of CD’s before? CD is short for ‘certificate of deposit’ and it means that you give the bank a certain amount of money for a set amount of time.

That set amount of time is the ‘term’ of the CD. So, when you give that money to the bank they get to use it however they want and in return, once the term is up, you get the initial money plus interest back.

Since a CD will lock your money in for a set amount of time you should buy them only with money you won’t need for a while.

The following chart from the 2019 FED Survey of Consumer Finances shows the average amount families invest in Certificates of Deposit have grown tremendously between 2001 and 2019. In 2001, the average was just $54.10 and it steadily increased every three years. It peaked in 2010 before steadily increasing again to a high of $101.95 in 2019.

Certificates of Deposit (CDs) holdings per family

When Do You Need It?

When it comes down to it, you’re making a loan to a financial institution (or the government) with a CD.

You’re agreeing to let them use your money for a set period of time that could range from six months to six years (or more) in exchange for getting a higher-than-normal interest rate.

Generally, you’re going to get even higher interest rates the longer you agree to let the bank use your money. That means a six month CD will pay you less than a six-year CD.

If you are really lucky you may be able to even get into one of the 3% APY CD’s that are currently going on with 5-year terms. What’s even more important is getting a CD where the rate is fixed rather than variable.

A variable-rate can change over the life of the CD (which means it can go down), while a fixed on stays the same as you originally agreed. We’ll talk about some of the other information in a minute, but let’s take a look at how the CD closes out.

What happens is your CD is going to ‘mature’ when it reaches the agreed-upon date. At some point before full maturity, you’ll probably get a letter or an email that lets you know that your CD is almost complete.

You get to decide what to do about things at that point. If you don’t make a decision then you could find that your CD is ‘rolled over’ into a new CD with the same terms.

CD or Money Market Account?

CDs are considered a form of savings accounts, but they offer much higher interest rates. They are both a safe place to keep money though for future and they give you a way to earn some interest on your money.

CDs do not allow you to touch the money while you have it in the account. Savings accounts usually let you withdraw or transfer money 1-3 times a month depending on your bank. Both are federally insured, so you don’t have to worry about losing your money.

Opening a savings account usually requires only a little money to open and a small minimum balance. CDs on the other hand require a larger minimum amount and usually make you keep the balance for the duration of the contract, or you risk losing interest accrued.

 CDMoney Market Account
Term6, 12, 18, and 60 months No limit
Access your fundNo AccessATMs, debit cards, checks
Minimum BalanceNone – 5,000 (varied)Usually $1,000-2,500
InterestAbout 0.5% (as of Aug 2021)About 0.5% (as of Aug 2021)
Withdrawal RestrictionsCan’t Withdraw before maturityTypically 3-6 withdrawals a month
FeesLittle to noneLittle to none
protectionup to $250,000 per account holder by FDICup to $250,000 per account holder by FDIC

1. Bump Up Your Interest with a CD

If you’re looking for the better interest you’re going to want to look at a CD to help you along. You commit to a set time period and you’ll earn better interest than with other methods of short-term ‘investment.’

You may even be able to get one of the current top five-year CD’s, with a rate of over 3% APY. Of course, a money market account has its perks too because they have some of the good from a savings account and some of the good of a checking account.

You can earn interest on these accounts like with savings, but you’ll get better interest usually. It’s going to depend on just where you decide to set up shop, however.

2. Limited Withdrawals with a CD

When it comes to your money market account you actually can make withdrawals, though the number is limited. Still, if you have an emergency or for some reason need to make extra withdrawals you can still do so, you just pay a fee for the privilege.

It can be a bad idea however, since your interest can be countered or even fully eliminated by the fee you have to pay to get the money.

On the other hand, a CD is an agreement by you not to touch the money. If you take any money out of the account during the term you agreed to you’ll have to pay a penalty right from the first time.

There’s no telling what that penalty will cost you either. It depends on the amount, the time you pull it and the bank you set things up with.

3. Meeting the Minimums with a Money Market Account

 Have you ever thought about the point of your savings account? It’s there to keep you from spending the money, right?

That’s why you generally get a lower minimum than you’ll find with other accounts (including money market accounts). You may no even find any minimum.

When it comes to a CD you’re actually going to have a similar situation. You’ll find that there are no minimums (depending on which financial institution you decide to set up with, that is).

If you really want to get the interest and the benefits however, you’re going to want a money market account, and those do have a minimum. Even worse (for you at least) is that the minimum could be upwards of several thousand dollars.

4. Staying Safe

If your biggest concern when choosing between the two types of accounts is safety then you’re in luck. Both of them are relatively safe.

Some people don’t really like sharing their personal information with anyone, but sharing it with a financial institution is going to help you in the long run.

What you can feel confident about, however, is that your accounts are insured by the Federal Deposit Insurance Corporation (a department of the government) up to $250,000. Plus, you don’t have to do anything to opt into this service and there are no fees.

How to Decide Between Them?

Now that you know a little more about each you may be curious about which one is the best option for you. So, what should you do?

  • How long until you need the money?
  • Do you have a short-term investment strategy?
  • Do you want to increase your flexibility when it comes to spending your money and accept lower interest or would you rather sacrifice flexibility for higher interest?

If you’re not going to need your money for at least a little while you can put it into a CD because it’s going to give you a little more interest but still be somewhat accessible.

You can even get involved with a CD ladder to make sure you’re building your money and getting some great interest at the same time. Finally, with a money market account, you’ll have the ability to spend and to get the interest that you’re looking for, a great balance of both worlds.

What is a CD Laddering?

CD laddering is a common kind of savings strategy. It usually happens when someone opens different CDs with different term lengths. They also renew the shorter-term CDs for long-term ones.

This tactic lets you benefit from long-term CDs, but you also get access to funds because you are using shorter-term CDs as well. You will need to spread cash equally over the CDs. This will allow you to free up portions of your money in the short term rather than having to wait until the term of the CD is over to withdraw and access money.

What Should I Do With 50k in Savings?

How do you invest $50,000 in the most efficient way? There are many options for this amount of money. Although it may not be enough money to leave your job and fly off to a beautiful island, it can certainly help you fund many of your dreams.

1. Maximize Your Retirement Savings

You don't have to wait too long to start planning for your retirement. You may be able to max out your 401k and individual retirement accounts with $20,000 in your pocket. The 401(k), annual contribution limit for 2021 is $19,500 ($26,000 for people 50 and older), and the IRA contribution limit for 2021 is $6,000 ($7,000 for people 50 and older).

If your employer offers this benefit, start at work and max out your 401k match. Your employer will match a percentage of every dollar that you invest. Although plan terms can vary, a match of 50% to 100% on employee contributions is common. It ranges from 3% to 66%. Make sure you contribute at least the amount required to receive the full match.

Next, you should open an IRA. Maximize it. To receive a tax break in retirement, you can choose a Roth IRA or a traditional IRA. Find out if your eligibility is met and which option is best for you.

It may be a good idea to increase your contributions to your 401(k), but you should also consider your investment goals and your immediate financial needs. Consider which of these three options is best for you.

With the rising cost of living, there is a pressure to save more for retirement. This is reflected in the average value of retirement accounts by family. As you can see in the following chart using FED Survey of Consumer Finances data, in 2001, the average was $151,000, but this has increased steadily over time to an average of $255,000 in 2019. However, the median figures have not seen such a dramatic increase, growing from $42,000 to $65,000 in the same period.

Retirement Accounts per years by family

You can save some money by putting it in a savings account with high yield.

You could also consider investing some of your $50K if you don't have an emergency fund. You can have peace of mind knowing that your living expenses will not be affected if you lose your job or become unable to work.

Saving money in the best savings accounts can be a great way of keeping an emergency fund available while earning interest. High-yield savings account offer higher interest rates than traditional savings accounts.

Online banks often offer the best bank account options because they don’t have to maintain a large branch network. Online banks can offer higher interest rates because they have lower overhead costs than traditional brick-and-mortar banks.

2. Invest with a Robot-Advisor

If you prefer to be more hands-off when investing, a robo-advisor may be the right solution. Robot-advisors make use of technology to manage your investments and set them up. They usually charge a lower fee than an in-person advisor for this service.

In-person advisors are limited to clients with investable assets of at least $100,000. Robo-advisors may have lower minimum balance requirements than others, while some may not require any.

A robo-advisor will ask you questions to help you determine your risk tolerance and investing style. It then uses algorithms to create portfolio allocations that are appropriate for your needs based on your circumstances. Robo-advisors invest money in exchange-traded fund, which are usually low-cost and diversified.

Robo-advisors can also help you manage your investments and increase your returns. Betterment, for example, offers portfolio rebalancing and tax harvesting as well as asset location.

If you are looking to invest $50K but don't want to actively manage your portfolio, a robot-advisor might be the right choice. This allows you to invest immediately and not wait. This allows you to spend more time in the market.

3. Inflation-proof Investments

As the COVID-19 pandemic continues, the cost of doing business is rising. Inflation is evident in the economy. The Consumer Price Index rose by 5.4 percent between June and the current year. This is due to the increasing prices of brands.

These are my top inflation-proof investments:

  • TIPS – Treasury inflation protected Securities are also known as TIPS. TIPS is an acronym for Treasury inflation-protected Securities. TIPS are investments that account for inflation. These inflation-protected bonds have a principal that increases with inflation and decreases with deflation. They pay interest twice a year at a fixed rate, which is added to their adjusted principal. These interest payments increase with inflation and decrease with deflation.
  • Gold & Commodities – Gold and commodities are often considered a hedge against rising inflation. Many consider gold to be an “alternative currency,” particularly in countries that are losing their currency. Investors should be aware of volatility in commodities and use caution when trading them.

4. Make sure you have an emergency fund.

An emergency fund is cash that you keep aside for unexpected, often expensive events. These funds can be used to help you maintain your standard of living in an emergency situation. You should not use emergency savings for immediate, or even unplanned, needs such as medical bills, lost wages, or car repairs. This will allow you to avoid building up credit card debt or borrowing money.

While your individual situation may dictate the amount of an emergency fund, it is recommended that you have enough cash to cover four to eight months of your monthly expenses.

5. Pay off high-interest debt

This is the next bullet. It's time for you to plan for the future and get rid of all high-interest debt. It's time to get rid if you have taken out high-interest loans or credit cards during the corona period. A credit card with a 17% rate and a $10,000 balance can offer a great return on investment.

It is almost like getting 17% on $10,000 when you pay off your debt. This is a great way to save money and also gives you peace of mind for the next recession.

FAQs

Money market accounts are a form of investment, not a savings account. This means there is the possibility of losing money and there is no guarantee of earnings. If interest rates are low then money market rates will also be very low, so investors cannot earn very much.

Money market rates usually do not ever go over inflation, so they are not good long-term investments. If you are looking for long-term savings or a long-term investment, you might want to consider an alternative to a money market account. A savings account can make sure you do not lose any money, but you also won’t gain any money other than the interest.

Unlike money market funds, CDs are safer because they are guaranteed by the federal government. This means they have to follow rules and regulations just like savings accounts. Most of them are guaranteed by the Federal Deposit Insurance Corporation (FDIC). This is a government-sponsored agency and they guarantee amounts up to $250,000.

Since the CDs are federally insured, the security of the principal amount you put into the CD is reserved the same as treasury bonds. The interest rates can fluctuate though and might not be reserved in the same way.

Unlike other bank accounts or CD accounts, most money market accounts do not charge a fee for closing the account. They also don’t have a set length that you have to keep your funds in the account before removing them. However, they will charge fees if your balance drops below the minimum amount.

If you aren’t using the account, you should close it to avoid monthly fees and fees when your balance is too low. You need to contact the bank to close the account, not just withdraw all the money. Always make sure the account is fully closed.

CD rates are almost always higher. If you want to make the most amount of interest, you can set up a CD account. However, you won’t be able to access the money until a certain term ends. So, a CD might not be the best plan if you think you will need the money in the short term. Withdrawing will result in fees that are several months or a year’s worth of interest.

Money market rates offer you access to your money, so you will be able to withdraw money up to 6 times a month. They also usually have larger minimum balances and sometimes offer checks.

The rates are usually only around the same as regular savings accounts though, so you won’t be earning very much interest. If you want to earn more interest, a money market account might not be the best choice.

A CD is basically a long-term savings account. You will be able to put money away for the future and earn high interest in it. You cannot access the money for the specified time period though without having withdrawal fees.

A mutual fund is more short-term and requires a high minimum deposit, while CDs can be opened with much lower amounts. Some mutual funds also require you to have a certain minimum balance to receive the highest interest rates.

Mutual funds are not insured by the FDIC. If you want a short investment though with access to the money whenever you need it, a mutual fund is a better option than a CD even though it does not earn as high interest.

A CD rollover is sometimes called a renewal. This means the money you invested can be deposited into a new CD. The interest you earned can also be invested into a new CD. Some banks automatically roll over the CD, so you will need to make sure you tell them you don’t want it rolled over if that’s the case.

Some CDs don’t have a rollover feature, so they will stop earning interest as soon as they mature. The bank will always send you a notice saying the CD is coming to an end and they will ask what you want done with it.