Money market vs. CD: How to choose the best option for you

Money market accounts and certificates of deposit both provide safe ways to grow your savings by earning interest over time. Although each can serve a similar purpose, they work in slightly different ways. Depending on your future financial goals and what you want for your savings, those differences can matter greatly.

Here's an overview of money market vs. CD features so you can decide if one—or a combination of both—may be best for your savings.

Money market accounts (MMAs) and certificates of deposit (CDs)are both low-risk savings options that offer higher interest rates than traditional savings accounts. While MMAs provide flexibility with limited check-writing and debit capabilities, CDs require you to lock in your money for a fixed term in exchange for a guaranteed interest rate, making them suitable for different financial strategies.

Money market accounts are interest-bearing accounts that share similarities with checking and savings accounts. They pay a higher interest rate on your balance than ordinary checking accounts as well as most savings accounts, but they still allow you easy access to your money.

• MMAs don't have a fixed term. Like a savings account, you can make additional deposits at any time.
• Your interest rate isn't fixed and fluctuates with the market rate.
• Some MMAs offer checking features such as check writing, debit cards and ATM access.
• Depending on the institution, the number of withdrawals you can take may be limited. The typical limit is six per month.
• MMAs are secure. They're covered by FDIC or NCUA insurance.

To avoid confusion, be aware that a money market account and a money market mutual fund aren't the same.

Certificates of deposit are a type of time-based deposit you can open at a credit union or bank. They typically pay a higher interest rate than checking, savings and money market accounts. However, they're also less liquid. You earn a fixed interest rate on a CD, and you receive that rate until the CD matures.

• CDs have a fixed term. You generally can't access your money until your CD matures. If you withdraw your money before the maturity date, you typically have to pay an early withdrawal penalty and will earn less interest than holding the CD to term.
• Maturity periods can range from as short as a few months to several years.
• You normally can't deposit more money into a CD once you open it. If you want to save additional money, you have to open another CD with its own maturity date and interest rate.

MMAs and CDs are both good savings vehicles. Understanding the difference between money market and CD is a matter of comparing the features to see which best addresses your needs. There are a few factors to consider—like when do you plan to withdraw the money or how long can you set it aside to earn a potentially higher rate of interest.

CDs typically have higher interest rates than MMAs. You can view this as a trade-off between liquidity and yield. If you know you may not need your money for a certain period of time, a CD may be a better choice because you can earn more interest.

CDs pay a guaranteed fixed rate until maturity. This allows you to lock in a rate that stays the same for the life of the security, making them especially appealing when you expect interest rates to fall. The interest rate you earn on an MMA is variable, which means it can go up or down based on the "money market" interest rate. Money market securities are short-term debt instruments that mature in less than one year. As short-term interest rates fluctuate, so do MMA rates. This can make them less appealing when you need or want certainty, especially if you expect interest rates to fall.

MMAs are liquid accounts that allow you to transfer funds, make withdrawals or write checks. CDs don't provide those functions. If you need to access your money regularly, an MMA might be a better choice. With a CD, you have to wait until the maturity date or pay a penalty if you need to make a withdrawal.

MMAs and CDs account balances both are covered by federal insurance if you open one through an FDIC member bank or NCUA member credit union. Each provides a safe and secure way to grow your savings. Both offer coverage up to $250,000 per person, per account type, per institution.

When choosing between a MMA and a CD, think about your plan for savings, and use the vehicle with the features that are most aligned with your personal preferences or priorities. It's essential to consider factors like financial goals, risk tolerance and your need for access to funds.

If you need regular access to your money or want the option in case you need it, a MMA may be a better choice. They're great vehicles for your emergency fund. If your primary goal is to get the most interest on your savings, a CD may be the best option. For example, you could use a CD to save for a large purchase like a car you plan to buy in a few years.

Of course, you may have midterm financial goals but still want to set aside some savings for easy access. In that case, you may find that splitting your savings between an MMA and a CD is a wise way to take advantage of the best features of both.

Both MMAs and CDs are low-risk investment options backed by the FDIC up to applicable limits, making them safe places to store money. However, there are subtle differences in interest rate risk. MMA interest rates can fluctuate over time based on market conditions, which may affect your returns. In contrast, a CD's rate is fixed, meaning you're guaranteed a specific return regardless of market changes. This may appeal to those with a lower tolerance for interest rate fluctuations.

Consider how often you'll need access to your funds. MMAs typically allow for limited transactions per month, offering a middle ground between accessibility and growth potential. CDs, however, require you to lock in your funds for a predetermined term, with penalties for early withdrawal, so they're best suited for money you don't need in the near future. If immediate access to funds is important, an MMA may be a better fit.

Using MMAs and CDs together can create a balanced savings approach, offering both liquidity and higher returns over various time horizons. Here's how each fits short-, medium- and long-term goals, along with the risks to consider.

• Short-term goals. MMAs are ideal for short-term needs or emergency funds due to their liquidity and moderate interest rates. They allow some check-writing or debit access, making them useful for expenses within a few months to a year.
  
• Medium-term goals. CDs with terms between six months and three years work well for medium-term goals, such as saving for a car or a vacation. By locking in a CD with a fixed rate, you can often earn more than with an MMA, while having a defined timeline for access to funds.
  
• Long-term goals. CDs with longer terms, such as five years or more, suit long-term savings goals where funds won't be needed soon. These CDs usually offer the highest fixed interest rates, making them beneficial for capital preservation and growth over extended periods.

• Inflation risk. Both MMAs and CDs are low-risk and relatively low-return savings vehicles, which may not keep up with inflation over long periods. MMAs generally adjust to interest rate changes, providing some inflation protection, but CDs are locked at their initial rate, potentially leading to a loss of purchasing power.
  
• Interest rate fluctuations. MMAs have variable rates that can go up or down, impacting your returns. CDs, by contrast, lock in rates, which can be advantageous if rates decrease. However, if rates rise, being locked into a lower rate with a CD could mean lost earning potential, so it may be wise to ladder CDs—staggering investments across multiple CDs with different maturity dates.
  
• Automatic renewals and early withdrawal penalties. CDs often automatically renew at the end of their term, potentially locking in a new rate that might not be favorable. Tracking CD maturity dates is essential to avoid unintended renewals. Additionally, CDs come with early withdrawal penalties, which could reduce returns if you need to access funds before the maturity date.