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A savings account, money market account, and CD are three tools for saving money.
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A savings or money market account could be a good place to keep your emergency fund.
You might use a CD to save for a goal that’s a couple of years away, like buying a house.
Your choice between the three accounts will probably come down to when you’ll need your money.
A savings account, money market account, and certificate of deposit are three places you can save your money. But how do you choose the best one for your situation?
Your right fit will come down to several details, including interest rates and how much you have for an opening deposit. The biggest factors will probably be when and how you want to access your money.
What is a savings account?
A savings account is a place to stash money you may need in the next couple years. It’s also a great place to store your emergency fund, or money you’ll need should you lose your job or your car breaks down unexpectedly, for example.
Savings accounts usually require a low minimum deposit. You can probably open one with $100 or less, and many don’t require an opening deposit at all.
Few savings accounts come with debit cards or paper checks, so you’ll want to find a way to access your savings quickly if necessary. In most cases, this means opening your savings account at the same bank as a checking account. This way, you can just transfer funds between accounts and spend the money almost instantly.
You’ll earn interest on a savings account, but the rate can change after you open it. Rates tend to increase when the economy is thriving and decrease when it’s struggling. Many banks pay low rates on savings accounts — the national average is FDIC National Deposit Savings Rates APY. But you can open a high-yield savings account at an online bank like Bask Bank, TAB Bank, or CIT Bank to earn significantly better rates. The most competitive high-yield savings accounts offer at least 3.25% APY right now.
What is a money market account?
Money market accounts work similarly to savings accounts. They’re useful tools for saving for relatively short-term goals. You’ll earn interest on your money, but the rate can change after you’ve opened the account.
Depending on the bank, you may need a low-to-medium minimum opening deposit. Some institutions don’t have a minimum deposit amount, while others ask for hundreds or even thousands of dollars.
The biggest difference between a savings account and money market account is how you access your money. With a savings account, you’ll probably have to transfer funds to a checking account. But money market accounts usually come with debit cards, ATM cards, or paper checks, making it easier to spend your money. This means money market accounts are especially useful places to keep your emergency savings, because you’re able to access your money in a pinch.
You can find online money market accounts with high rates. Some of the most competitive accounts are with CFG Bank, Sallie Mae, and Discover.
What is a CD?
A certificate of deposit is another type of savings tool, but it works differently than a savings or money market account.
You choose a CD term, such as six months, one year, or five years. You’ll deposit money into your CD and withdraw funds once the term ends. You can’t take out money early, unless you want to pay a fee.
You’ll earn interest on a CD, and unlike with a savings or money market account, that rate won’t change while the account is open. If you open a five-year CD at 4.50% APY, you’ll still earn 4.50% four years and 11 months down the road.
It’s possible to find a bank that requires low minimum deposits on CDs, or even none at all. But for the most part, minimum deposits are relatively high, usually thousands of dollars. You also can’t add more money to your CD later, as you can with a savings or money market account. You park your opening deposit in the account and let it sit until the term ends.
You may earn a higher rate on a CD than on a savings or money market account, especially for longer terms. You’ll probably earn a better rate if you go with an online bank, like Synchrony or First Internet Bank of Indiana than with a large brick-and-mortar bank.
Savings vs. money market account vs. CD
Here are the main differences between savings accounts, money market accounts, and CDs. These are general rules of thumb, but keep in mind accounts vary by institution. For example, this table indicates that most CDs require high minimum deposits — but banks like Ally and Capital One don’t have minimums.
Savings accountMoney market accountCDEasy access to your moneyYesYesNoInterest rateVariableVariableFixedMinimum opening depositLowMediumHighAdd money laterYesYesNo
Still not sure which account is your best fit? Here are the pros and cons of each type:
Pros and cons of savings accounts
Pros
If a bank increases its savings rate, you can get a higher rate than when you opened the accountCan transfer money to checking for easy accessLow minimum opening deposit (Generally, less than $100)
Cons
If a bank lowers its savings rate, your rate will decrease tooUsually, no debit cards or checksBanks may charge monthly service fees
Pros and cons of money market accounts
Pros
If a bank increases its savings rate, you can get a higher rate than when you opened the accountMost accounts include a debit card, ATM card, and/or paper check
Cons
If a bank lowers its savings rate, your rate will decrease tooMoney may be more tempting to spend with a debit card or check handyMedium minimum depositsMany banks charge monthly service fees
Online banks usually pay higher rates and charge lower fees than brick-and-mortar banks. The main tradeoff is that there are no physical branch locations.
Pros and cons of CDs
Pros
If a bank’s rates drop, you can keep your higher rateBanks usually pay higher rates long-term CDs, than savings accounts or money market accountsNo monthly service fees
Cons
If a bank’s rates go up, you’re stuck with a lower rateShorter terms may have lower rates than savings or money market accountsIf you withdraw money early, you’ll have to pay a penaltyCan’t deposit money after you’ve opened your CD
Which savings account is best?
If you want easy access to your cash, a savings or money market account is likely the better choice these days. If you have an emergency and need to withdraw funds from a CD early, you’ll pay an early withdrawal penalty.
But depending on your situation, you may still want to open a CD— especially if you already have a fully-funded emergency fund in a different account and want to save for another goal. For example, maybe you want to buy a house in a couple years. You could open a 2-year CD and earn a guaranteed rate of return without risking your house savings in the stock market.
How to choose the right account
First, ask yourself how soon you expect to need this money. Could it be any day now, or at the drop of a hat like with an emergency fund? If so, you probably want a savings account or money market account. If you’re saving for a longer-term goal, you might prefer a CD.
Then think about whether you want a debit card and paper checks to access your money. If you like the idea, you may want a money market account. If you think you’ll be tempted to spend, a savings account may be better.
Finally, search for an account that either doesn’t charge monthly service fees or makes it easy for you to waive them. There’s no need to pay a bank simply for storing your money.
Keep in mind, you don’t necessarily have to choose just one of these accounts. You can open two or even all three, if it makes sense for your savings goals.