If you’re looking for ways to save that will grow your money more quickly than a traditional savings account, it may be worth comparing a couple of savings options: money market vs. certificates of deposit. Both options may help you earn more money through higher interest rates.

When it comes to money market accounts vs. certificates of deposit, which is better? That depends on how you want your money to work for you. When you compare money markets and certificates, one option may stand out as a better fit for you, depending on your specific needs. For some people, the flexibility of a money market account wins hands-down. For others, the higher interest rates of certificates are a top priority.

As with any financial decision you make, it’s important to understand the positives and negatives of each type of deposit account.

Money Market Accounts

What are money market accounts and how do they work?

Money market accounts are similar to both savings and checking accounts. These accounts earn interest, like savings accounts, while also providing some of the access you get with a checking account, though with some limitations. For example, withdrawals and payments via check, debit card, draft or electronic transfer are limited to six per month total for money market accounts. But withdrawals or payments done via ATM or in person, by mail, by messenger or via telephone check don’t count against that limit.

Pros of money market accounts

  • Higher earning: Interest rates are typically higher than a traditional savings account
  • Low risk: Insured by FDIC or NCUA
  • Flexibility: Some features of a checking account and money is accessible

Cons of money market accounts

  • Minimums: Potential minimum deposit requirements
  • Unpredictability: Typically have a variable interest rate
  • Limitations: Six total transactions allowed using a check, debit card, draft or electronic transfer

Certificates of Deposit

What are certificates of deposit and how do they work?

A certificate of deposit is a unique type of savings account that requires you to keep the funds in the account for a set period of time.

Terms are often anywhere from six months (short-term certificates) to five years or more (long-term certificates). At the end of the term, the certificate “matures,” and you’ll receive the initial amount you put into the certificate, plus the interest that accrued on that amount over the certificate term. The rate of return you receive (and other types of deposit accounts) is the annual percentage yield (APY) and is a fixed rate.

Pros of Certificates of Deposit

  • Predictability: Fixed interest rates
  • High earning: Higher rates than traditional savings accounts
  • Low risk: FDIC or NCUA insured
  • Variety: Different term lengths
  • Less temptation: Funds locked for a set period of time and are unavailable to spend.
  • This can be handy if you want a safe place to keep money designated for a big-ticket item such as a car or down payment.

Cons of Certificates of Deposit

  • Minimums: Minimum deposit requirements
  • Limitations: No access to your money while it’s in the certificate
  • Penalties: Cost for early withdrawal

It’s important to understand the pros and cons of money market accounts and certificates of deposit so that you can choose the savings vehicle that best meets your savings goals. For some people, the flexibility of a money market account wins hands-down. For others, the higher interest rates of certificates are a top priority.

There’s no one right or wrong answer for which type of savings strategy to choose. In fact, your overall savings plan can include both a money market account and certificates of deposit. The important thing is to determine and execute a comprehensive savings plan so that your money can grow and work harder for you.

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