Managing Money Should I Use a Money Market Account or a CD?

by Rebecca Lake | March 01, 2019

So, you've decided to get serious about savings this year. (Bravo!)

But do you know where it makes the most sense to put your money?

Interest rates have been climbing lately, and money market accounts and Certificate of Deposit (CD) accounts are giving traditional savings accounts, well, a run for their money.

But first, the basics: CD accounts are time deposits that have a fixed interest rate, fixed term and fixed maturity date when money can be withdrawn. A money market account is an interest-bearing account that typically earns a better rate than traditional savings accounts. Money market accounts follow Regulation D rules for monthly withdrawals (up to six per month are allowed) and may come with checks or a debit card.

Understanding the ins and outs of each account type and how it relates to where you are in life — whether starting your first job or heading into retirement — will help you maximize what you sock away.

Timing is everything

"Naturally, your specific financial objectives will change from when you're in your 20s to when you're in your 40s or 50s," says Michael Osteen, founder and chief investment strategist at Port Wren Capital. "The key, regardless of your age, is to save as much as you can and get the highest interest rate possible."

Thinking about the short and long term can give you clarity on whether a money market or CD account is the better fit for saving. "Generally, it's better to use a money market account when you have or may have an immediate need for cash, such as an emergency fund," says Richard Best, a personal finance expert at savings and discount site

Best says money market accounts offer more flexibility for near-term savings goals, or for goals that don't have a clear timeline.

Riley Adams, a 29-year-old CPA and personal finance blogger, and his wife are saving for a down payment on a first home. They chose not to keep their savings in a CD because they didn't want to risk having to pay a penalty. Withdrawing money from your CD before it matures could trigger a penalty.

Similarly, self-employed personal finance blogger Marc Andre, 40, keeps his emergency savings in a high-yield money market account so he can easily access it to supplement his income during slower months.

A CD, on the other hand, could be right for money you know you won't need for several months or years.

Consider the rates

While CDs typically have fixed rates, money market rates can fluctuate over time.

Nationally, the top annual percentage yield for a one-year CD was 2.9%, as of January 2019. The average rate for any CD account is 0.88%.

Money market rates tend to lag CDs slightly. The average money market account APY was 0.21%, as of January 2019. The most competitive rates on money market accounts currently hover around 2.35%. A CD can offer stability and predictability, things savers may appreciate as they move into their 40s and 50s.

"Capital preservation becomes more important as investors approach the retirement phase of their financial lives," says personal finance expert Jim Brown. "A 50-something investor who seeks higher, yet reliable, yields over longer terms, especially during periods of interest rate volatility, may prefer the guaranteed rates of return offered with CDs."

In a rising rate environment, however, money market accounts can look more appealing.

"As rates increase, money market account yields can follow suit whereas CDs with longer-term maturities can lock you in to a lower rate until it matures," Best says.

Brown recommends using a ladder of CDs with varying maturity terms and annual percentage yields as rates rise. Osteen's preferred strategy is to stick with one-year CD terms and renew them (ideally at a higher rate) once they mature.

A CD can offer stability and predictability, things savers may appreciate as they move into their 40s and 50s.
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4 fees to account for

High-yield money market and CD accounts can dazzle savers with great rates, but it's important to check the fees. Those may include:

  • Monthly maintenance fees
  • Minimum balance fees (for money market accounts)
  • CD early withdrawal penalties
  • Excess withdrawal fees (which can apply to money market accounts if you make more than six qualified withdrawals per month)

The more fees a money market or CD account charges, the less of your interest earnings you get to keep. The good news, says Best, is that "in today's competitive banking environment, you can easily find CDs and money market accounts that charge no or very low fees."

Young adult man wearing glasses looks out the window at some trees

Consider a combo approach

Money market accounts and CD accounts can work together to help you reach your savings goals. Take 34-year-old digital marketing strategist Alexandra Tran, who is hoping to retire at 45 by saving in a combination of IRA CDs and a money market account. IRA CDs follow the contribution, distribution and taxation rules of a traditional or Roth IRA, depending on which one you choose.

Tran says she prefers IRA CDs primarily for the tax break she receives for contributions. But she supplements her retirement savings with a money market account once she hits the annual contribution limit for her CDs each year.

Brown offers another example of how to use both CDs and money market accounts to grow your money: splitting your rainy day fund in half between a high-yield money market and a high-yield CD. This way, you get liquidity and the potential for a great rate.

Money market accounts and CD accounts can work together to help you reach your savings goals.
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Consider how much you can save before committing to both a CD and money market account.

"If you have the funds, naturally it's better to have both," Osteen says. But if your budget only goes so far, you may need to focus on one savings goal at a time.

If you don't have a lot to save, consider opting for a small savings account that earns interest. Look for one with a low account opening requirement and no minimum balance or monthly maintenance fee.

Using a cash rewards credit card to cover expenses is an easy way to add to your savings. If you're earning, say, 2% cash back each month, you can funnel that into savings until you're ready to step up to a CD or money market account.

Just remember, of course, to pay your card in full each month. Otherwise, the interest charges could outweigh the interest you're earning by putting cash rewards into a savings account.

Rebecca Lake

is an avid financial goal-setter and saver. She's currently saving to buy a small urban homestead using a combination of high-yield CDs and a money market account.