Author | Cole Fikse
Everyone wants to make the most of their savings. But what is the best approach? In times of high interest rates, certificates of deposit (CDs) and money market accounts are two increasingly popular methods to earn competitive interest, even when compared with high-yield savings accounts. When selecting which method to grow your cash and support your financial goals, it’s important to understand the details of each to make the right choice for you.
Certificates of Deposit (CDs)
Often referred to as time deposit accounts, CDs offer a fixed interest rate and FDIC insurance, but enforce time restrictions on when you can access your funds. This enables a guaranteed return to be collected at the maturity date – often between six months and a year.
Here are some of the pros and cons for CDs:
Pros
- Fixed interest rate for entire term (low interest rate risk)
- Higher interest rates
Cons
- Withdrawal penalties for accessing money before the maturity date
- Cannot make additional deposits after initial investment
- Often have minimum deposit requirements
In short, CDs provide a great option to achieve competitive interest rates by locking in money for a predetermined period.
Money Market Accounts
Money market accounts are also a type of FDIC-insured deposit account that can provide consumers with high-yield interest rates, enabling accelerated earnings when compared to traditional savings accounts. However, when compared with CDs, money market accounts prioritize flexibility over earning the highest returns.
Here are the primary pros and cons for money market accounts:
Pros
- Allows additional deposits at any point
- Ability to access funds at your convenience
- Often provides debit cards, ATM cards, and check-writing capabilities
Cons
- Withdrawal limits
- Often have significant deposit minimums
- Occasionally charge monthly fees
- Fluctuating interest rates
Considering this, money market accounts are quality options to earn high interest yet maintain financial flexibility.
Which is best for you?
Both CDs and money market accounts provide various benefits depending on your preferences and financial situation, including higher rates than the best savings accounts interest rates.
Money market accounts include greater flexibility and ease of access. This makes it a superior option for setting up an emergency fund while maintaining high interest rates on your cash. Moreover, these accounts allow additional deposits after the initial investment, best for those aiming to add to their savings over time. Are you looking to earn more for your money, but still want occasional access to your funds? A money market account could be a good choice. Just make sure to carefully consider your financial needs, the account’s APY, and any additional fees or guidelines to ensure you make an informed decision.
CDs are best for money that you don’t need to access soon. For example, they tend to be a reliable choice when saving money for a large purchase, like a down payment, because rates for CDs are guaranteed. However, because CDs prevent numerous deposits, they are most beneficial when an initial large sum is placed into the account.
Consider current interest rates
Another important factor to consider is the state of interest rates today. If rates are expected to rise, money market accounts could be a good choice, as subsequent deposits earn higher interest. On the other hand, if interest rates are predicted to drop, high-rate CDs can lock in your money and guarantee a high return. Therefore, researching current economic forecasts to make smart decisions may increase your earnings.
What about both?
For some, opening both a money market and a CD could be the best of both worlds. California Bank & Trust CFO Chikako Tyler, notes that it can be an excellent diversification strategy by “maintaining flexibility with accessing funds but also in case the interest rate environment changes.”
Always keep yourself informed
It is important to keep your own financial goals in mind and stay informed about the bank offerings available to you. While certain advertised APYs may seem appealing, the best rates for CDs and money markets can often be found with just a little bit of digging. So, whatever you choose, make the investment best for you.