Money Market vs. CD: What's Better? - NerdWallet (2024)

FAQs

Which is better CDs or money market account? ›

Typically, a money market account pays less than a CD because a CD requires you to keep your cash in the account for a set period of time. Money market accounts with higher yields typically require you to maintain a higher balance to earn the highest APY, but you may need more money up front to open a CD.

CDs can have higher rates than a money market account, but those are often the long-term accounts from two years and upward. That means that to snag a CD rate that's higher than a money market account rate, you'll most likely have to wait a couple years to have access to that money.

CD rates are typically higher than money market account rates. Banks have an incentive to give you better rates for CDs because you promise to give up access to your money until the end of the CD term.

One of the biggest disadvantages of a money market account is that some financial institutions may put a cap on how many convenient withdrawals you can make each month. The Federal Reserve once limited consumers to six per month, though this rule was phased out in 2020.

Are CDs Safe If The Market Crashes? CDs are generally considered to be a safe investment, even during times of market turmoil. This is because CDs are issued by banks and are backed by the full faith and credit of the United States government.

Cash equivalents, which include things like bank CDs and Treasury bills, are often used by millionaires and billionaires to fund their ongoing expenses.

Compared to stocks or other securities, CDs are a relatively safe investment since your money is held at a bank. The biggest risk to CD accounts is usually an interest-rate risk, as federal rate cuts could lead banks to pay out less to savers.

Short-term bonds can be relatively low-risk, predictable income. Stronger returns can be realized when compared to money markets. Some bonds even come tax-free. A short-term bond offers a higher potential yield than money market funds.

Big picture: CDs fit in the cash portion of a portfolio

“Having around 5% or so of your overall portfolio in cash investments may make sense for long-term investors,” Rob Williams, certified financial planner and managing director of financial planning at Charles Schwab, said in an email.

Why would anyone want a CD? ›

Certificates of deposit, or CDs, offer a chance for you to keep your cash safe from loss of principal — and potentially earn a higher interest yield than what you'd get with a savings account.

Easy access: Money market accounts can offer you immediate access to your funds, almost whenever you may need it. MMAs often offer the ability to write checks or access cash via debit card. And know you can typically withdraw without paying a fee as you might with a certificate of deposit (CD).

A one-year CD with a $10,000 opening deposit that earns a yield of 5.1 percent would be worth around $10,510 when it matures in 12 months' time. This high-yielding one-year CD would earn you around $342 more in total interest than a CD earning the national average rate.

Both money market funds and CDs are relatively safe investments, delivering an income stream in the form of interest or dividends. Money market funds are generally more liquid than bank or brokered CDs.

CD rates will likely increase in 2023 if the Federal Reserve continues to increase the federal funds rate. The Federal Reserve has indicated a willingness to continue increasing its benchmark interest rate to combat inflation, and this is likely to drive CD rates higher in 2023.

Money market accounts tend to pay you higher interest rates than other types of savings accounts. On the other hand, money market accounts usually limit the number of transactions you can make by check, debit card, or electronic transfer.

Six to 12 months of living expenses are typically recommended for the amount of money that should be kept in cash in these types of accounts for unforeseen emergencies and life events.

The takeaway. Money market accounts are a great option if you're looking to maximize the amount of interest you can earn in a low-risk setting. You'll have easy access to your money, your account is insured up to $250,000, and it's a great financial tool to help you reach your short-term savings goals.

A certificate of deposit (CD)

Unlike high-yield savings accounts, CD rates are fixed at the time you open the account. If you open a CD at the beginning of a recession when interest rates are high, you'll be able to lock in a high rate for the entirety of the CD's term, even if interest rates go down.

You generally can't lose money with a CD from a financial institution insured by the FDIC or NCUA. Unlike stock investments, CDs don't fluctuate in value. That being said, you can lose some or all of the interest you've earned if you withdraw money before the CD's maturity date.

Where is your money safest during a recession? ›

Healthy large cap stocks also tend to hold up relatively well during downturns. Investing in broad funds can help reduce recession risk through diversification. Bonds and dividend stocks can provide income to cushion investors against downturns.

But when it comes to long-term savings, Dave Ramsey cautions against opening a CD. In fact, he insists that CDs are really nothing more than glorified savings accounts with slightly higher interest rates. The problem with those rates is that they don't do a good enough job of keeping up with inflation.

CDs, unfortunately, are not the ideal investment for an inflationary environment. If the interest rate on a CD can't keep up with inflation, your money loses purchasing power.

The interest you earn on a certificate of deposit (CD) or share certificate is taxable as regular income, unless you've opened a tax-advantaged account like an IRA CD.

By some measures, CDs may be able to keep up with inflation. However, your actual purchasing power is based on your income after taxes. The interest earned from CDs held outside of a qualified retirement plan is taxable as ordinary income, so the net return of CDs is reduced by your effective tax rate.

Here are the best low-risk investments in June 2023:

Short-term certificates of deposit. Money market funds. Treasury bills, notes, bonds and TIPS. Corporate bonds.

When saving for a financial goal, it's important to make sure you're utilizing the most beneficial investment type for your goal based on its time horizon. Money market funds make the most sense for short-term goals and generally should not be used for long-term investing, such as retirement.

Current promotional CD rates

5.05% APY (annual percentage yield) as of 03/28/2023.

When should you put money in a CD? ›

The best time to buy a CD is when interest rates are high or you have a specific savings goal that would be suited to a CD. The higher the interest rate on a CD, the more your money can grow during the maturity term.

Can you get 6% on a CD? Savers who don't mind locking up their funds for a specified amount of time can earn 6% interest on a CD.

Certificates of Deposit Risks

The main risk with a certificate of deposit is that you may need to pay the penalty if you withdraw your money before the end of the term. This can eat into your earnings, so it's important to ensure you won't need the money during that time.

Both CDs and savings accounts are FDIC-insured, so neither is safer than the other. A CD, though, does offer a guaranteed return after the maturity for the account has been reached. Savings accounts are less certain in terms of interest earned.

“CD rates should continue to climb in the near future as demand for deposits continues and while the Fed continues to raise interest rates,” Garcia says.

Ramsey recommends putting your money not into a savings account, but instead into a money market account. "Most money market accounts will give you a debit card and checks to use -- that way, you can get to your money when you really need to (keeping it 'liquid')," the Ramsey Solutions blog states.

For the most part, money markets provide those with funds—banks, money managers, and retail investors—a means for safe, liquid, short-term investments, and they offer borrowers—banks, broker-dealers, hedge funds, and nonfinancial corporations—access to low-cost funds.

Money market accounts work like other deposit accounts, such as savings accounts. As customers deposit funds in a money market account, they earn interest on those funds. Typically, interest on money market accounts is compounded daily and paid monthly.

A three-month CD is a good investment for someone who wants to earn interest on their deposited funds but does not want to commit to a longer-term CD.

What is the highest rate a CD has ever been? ›

Do no withdraw cash. Despite the recent uncertainty, experts don't recommend withdrawing cash from your account. Keeping your money in financial institutions rather than in your home is safer, especially when the amount is insured. "It's not a time to pull your money out of the bank," Silver said.

Currently, a yield-curve inversion is in place when it comes to average CD yields, which are as follows, based on Bankrate data for May 31, 2023: 1-year CD average: 1.71 percent APY. 2-year CD average: 1.39 percent APY. 5-year CD average: 1.22 percent APY.

The return on T-bills tends to have an inverse relationship with inflation and the Federal Reserve benchmark rate. A higher rate set by the Federal Reserve means lower returns on T-bills. By contrast, CDs and high-yield savings accounts tend to give higher returns as the Federal Reserve benchmark rate increases.

Some money market accounts come with minimum account balances to be able to earn the higher rate of interest. Six to 12 months of living expenses are typically recommended for the amount of money that should be kept in cash in these types of accounts for unforeseen emergencies and life events.

Retirement money market accounts are money market accounts held in a retirement account such as a 401(k) or an individual retirement account, or IRA. These accounts pay low interest, but provide liquidity and stability. Retirees can use retirement MMAs to write checks and make withdrawals as needed.

Yes, CD rates are currently on the rise. In March 2023, the Federal Open Markets Committee (FOMC) raised the target range for the federal funds rate by 0.25%, bringing the benchmark range to 4.75% to 5.00%. Banks generally use the federal funds rate as a guide when setting rates on savings and lending products.

For the most part, money markets provide those with funds—banks, money managers, and retail investors—a means for safe, liquid, short-term investments, and they offer borrowers—banks, broker-dealers, hedge funds, and nonfinancial corporations—access to low-cost funds.

When should you use a money market account? ›

Money market accounts are best for those saving for short-term goals. For example, if you're building an emergency fund, a money market account could be a good place to store that cash. But if you're saving for retirement, then a CD or retirement account would be a better fit.

CDs are More Accessible Than Vinyl

We know vinyl fanatics love to rave about the quality of sound, but the truth is that CDs can hold their ground. To begin with, CDs are significantly cheaper than vinyl, especially when you consider that for new chart releases, you'll be paying about twice as much for vinyl than a CD.

Both certificates of deposit (CDs) and bonds are considered safe-haven investments with modest returns and low risk. When interest rates are high, a CD may yield a better return than a bond. When interest rates are low, a bond may be the higher-paying investment.