Money market account vs. CD: How should you grow your savings?

When you're looking for a place to tuck away savings and see your money grow, you have options beyond a savings account. Money market accounts (MMAs) and certificates of deposit (CDs) offer the stability of a traditional savings account with higher interest rates. While both can help you boost your savings, there are distinct differences between a money market account and a CD.

Let's compare these two types of savings accounts to see which one may be right for your financial goals.

We'll cover these topics:

• What's the difference between a money market account and a CD?
• Are money market accounts or CDs FDIC-insured?
• Pros and cons of CDs and money market accounts
• Money market account vs. CD: Which should you choose?
• Money market account vs. CD vs. mutual fund: What are the differences?
• FAQs about money market accounts and CDs
• How do you open a money market account or a CD?

What's the difference between a money market account and a CD?

A money market account and a CD can help you set money aside for future goals, such as building an emergency fund or saving for a down payment. Both accounts earn interest. But CDs limit access to your money during the term and money market accounts don't.

A CD is a type of timed deposit account. When you open a CD, you choose the term length, or how long you'll leave a set amount of money in the account. CD terms can range from three or six months to longer than five years. Often, the longer the CD term, the higher the interest rate. If you need to take money from your CD before the term ends, you pay a penalty, often in the form of a few months' interest.

A money market account doesn't have fixed term lengths. It operates similarly to a savings account with a few features you'd commonly see in a checking account, such as a debit card or checks. If you need to withdraw from your money market account, you can do so, typically without a penalty.

Are money market accounts or CDs FDIC-insured?

Yes, the Federal Deposit Insurance Corporation (FDIC) insures both money market accounts and CDs in the rare case a bank fails. FDIC insurance covers up to $250,000 per depositor, per ownership category, per bank.

If you have $200,000 in a money market account and $50,000 in a CD at the same bank, the full amount is covered. If you have $250,000 in a money market account at one financial institution and $100,000 in CDs at another, the full value is covered.

Pros and cons of CDs and money market accounts

Money market account vs. CD: Which should you choose?

Either account may be ideal for saving for a short- or medium-term goal. You typically don't see high enough returns on CDs or money market accounts to make them ideal for longer-term savings, such as retirement. Whether a CD or money market account is the right choice for you depends on what you're saving for, when you'll need the money and the interest rates on offer.

Here's an example: Erika plans on buying a house in three years. She's currently saving for a down payment and already has $20,000. She wants to put the money in an FDIC-insured account so it doesn't lose value. She can choose from a money market account that earns a variable 3% interest rate or a 36-month CD that earns a fixed 3.5% interest rate. In this case, the 36-month CD makes sense, as she isn't planning on buying for at least three years. The CD's rate is fixed and is currently higher than the money market rate.

Now, let's change Erika's situation slightly. She still wants to buy a house but may do so before three years are up. If the right home at the right price comes along in a year or two, she wants to be ready. In this case, choosing the money market account can make more sense. She won't pay a penalty if she needs to access her money early. She's still earning a decent interest rate, and since it's variable, the rate could increase over time, allowing her to earn more interest.

In short, CDs can be the right pick for medium- or longer-term savings goals when you know you won't need the money for a set period of time. If you want to maintain easy access to your cash, go for a money market account.

Money market account vs. CD vs. mutual fund: What are the differences?

Another way to save money and have it grow is to invest in a mutual fund. These are different from CDs or money market accounts. When you invest in a mutual fund, you're buying into a portfolio of securities that can include stocks and bonds. A company or individual manages the fund and chooses the securities, with the goal of outperforming the market benchmark. Ideally, a mutual fund will give you a return on your investment.

But unlike a money market account or CD, which earns interest no matter what, the return on a mutual fund isn't guaranteed. If market conditions dip or the securities in the fund go under or don't perform well, you can lose money. Mutual funds aren't FDIC-insured and are considered riskier than CDs or money market accounts.

Mutual funds also charge fees, which eat into the amount you earn. The fees vary based on the fund but can include a management fee, account fee, purchase fee and redemption fee.

How do you open a money market account or a CD?

The first step to opening a money market account or CD is to choose a bank. Research interest rates for either type of account and available terms for CDs. If you're considering a money market account, see if it has balance minimums, fees and transaction limits. Also, note how interest is calculated. Some accounts compound daily, others monthly. It's common for accounts to add interest to your account each month, but some accounts may wait a year before adding accrued interest to your bank account balance.

Are you hoping to expand your savings options? Learn more about CDs and money market accounts at Citizens.