Money Market vs. CD: Which Should You Use?

Right now, it isn’t hard to find CD and money market offerings with a 3.00% APY or higher. If both account types can earn you a decent return, what other factors should you consider when deciding between a money market vs. a CD for reaching your financial goals?

Money Market vs. CD: Factors To Consider

You may already know the basics of a money market account and a CD.

Money market accounts are variable interest-bearing deposit accounts that blend some characteristics of checking and savings account. You can make unlimited deposits, and many money market accounts come with check-writing privileges and a debit card. What is the downside to money market accounts? Some have monthly withdrawal limits and high minimum balance requirements, and they often have a lower interest rate than a savings account or CD.

A certificate of deposit, or CD, is a savings vehicle in which you make one initial deposit, and your money earns a fixed interest rate for a fixed term. Traditional CDs often earn a higher APY than money market accounts. The downside with CDs is that they don’t allow additional deposits and early withdrawal usually comes with a penalty — your money is locked in.

Liquidity

Both money markets and CDs are relatively liquid options. However, neither offers total liquidity. Both account types can penalize you for accessing your money more often than allowed per your account terms.

Money market accounts are more liquid than CDs since they do allow monthly access, where CDs are inaccessible — if you want to avoid the early withdrawal fee — until the end of the term, which could be as long as 10 years.

Penalties and Fees

With CDs, you’ll usually incur a penalty for cashing out before the CD matures. Depending on the financial institution, money market accounts may charge transaction fees for excessive withdrawals or a monthly service charge if you don’t maintain minimum account requirements.

Volatility

Money market accounts and CDs are both safe instruments for cash holdings. Neither is impacted by security market fluctuations, and both carry FDIC insurance up to $250,000.

Can a Money Market Account Lose Money?

Yes, you can indirectly lose money with a money market account through fees if you don’t maintain minimum account requirements or if you make excessive withdrawals. However, you won’t lose money in the sense that investments can lose money.

Can a CD Lose Money?

You can lose a portion of your CD principal if you withdraw funds before the CD maturity date and haven’t yet accrued enough interest to cover the penalty. Like with a money market account, though, you won’t lose money unless you end up paying fees.

Examples of Savings Goals Suited for Money Markets vs CDs

Is it better to have a CD or money market account?

Money market accounts are useful for storing emergency funds or saving for large, nonrecurring expenses, such as tax bills or major purchases, since your funds will have more liquidity than CDs.

CDs make sense for future anticipated capital needs, such as a down payment for a house you hope to purchase in five years or college tuition you’ll need in two years.

Final Take

Whether a money market vs. CD is better depends on your savings goals. If you won’t need to access your money for the short term, a CD may allow you to earn more. However, a money market account may be better if you’re unsure when and how often you’ll need access to your funds.

Whichever type of account you choose, be sure to carefully compare the rates, terms and requirements of offerings from different banks to find an account that best meets your savings needs and will earn you a good interest rate.

This article originally appeared on GOBankingRates.com: Money Market vs. CD: Which Should You Use?