Savings account vs. Money market account vs. CD: Which is the best?

  • A savings or money market account could be a good place to keep your emergency fund.
  • You can use a CD to save for a goal a few years from now, like buying a house.
  • Your choice between the three accounts will likely depend on when you need your money.
  • See Insider’s Picks For The Best High Yield Savings Accounts »

A savings account, money market account, and certificate of deposit are three places where you can save your money. But how do you choose the one that best suits your situation?

Your right choice will come down to several details, including interest rates and how much you have available for an opening deposit. The most important factors will probably be when and how you want to access your money.

Which account is best during the COVID-19 pandemic?

Many Americans have changed the way they think about their savings during the coronavirus pandemic. So which of these three savings tools is the best option right now?

You probably want easy access to your money during the pandemic. If you’re one of the many Americans who lose their jobs, you’ll need to tap into emergency savings to cover necessary expenses. You could also face a huge and unexpected hospital bill if you or a family member becomes ill.

This means that a savings or money market account is probably the best choice these days. If you have an emergency and need to withdraw funds from a CD sooner, you will need to pay an early withdrawal penalty.

But depending on your situation, you might still want to open a CD, especially if you already have a fully funded emergency fund in another account and want to save for another purpose. For example, you might want to buy a house in a few years. You could open a 2-year CD and earn a guaranteed rate of return without risking your home equity savings.

Savings account vs money market account vs CDs

Here are the main differences between savings accounts,

money market accounts
, and CDs. These are general rules, but keep in mind that accounts vary by institution. For example, this table indicates that more CDs require high minimum deposits, but banks like Ally and Capital One don’t have a minimum.

Still not sure which account is right for you? Here are the pros and cons of each type:

Advantages and disadvantages of savings accounts

Pros and Cons of Money Market Accounts

Advantages and disadvantages of CDs

What is a savings account?

A savings account is a place to put the money you might need for the next two years. It’s also a great place to store your emergency fund, or money you’ll need if you lose your job or your car unexpectedly breaks down, for example.

Savings accounts generally 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 quickly access your savings if needed. 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 will earn interest on a savings account, but the rate may change after you open it. Rates tend to rise when the economy is booming and fall when it is struggling. Many banks pay low rates on savings accounts – the national average is 0.05%. But you can open a high yield savings account at an online bank like Ally, Discover, or Capital One to get much better rates.

What is a money market account?

Money market accounts work the same way as savings accounts. These are useful tools for saving for relatively short-term goals. You will earn interest on your money, but the rate may change after you open the account.

Depending on the bank, you may need a low to medium minimum opening deposit. Some institutions do not have a minimum deposit amount, while others charge hundreds or even thousands of dollars.

The biggest difference between a savings account and a money market account is the way you access your money. With a savings account, you will likely need to transfer funds to a checking account. But money market accounts usually come with debit cards or paper checks, making it easier to spend your money. This means that money market accounts are particularly useful places to store your emergency savings, as you can access your money in the blink of an eye.

You can find money market accounts online with high rates. Some of the more competitive accounts are those of Axos, Sallie Mae and CIT Bank.

What is a CD?

A certificate of deposit is another type of savings tool, but it works differently from a savings or money market account.

You choose a CD term, such as six months, one year, or five years. You will deposit money on your CD and withdraw funds when the term ends. You can’t early withdraw money unless you want to pay a fee.

You will earn interest on a CD, and unlike a savings or money market account, this rate will not change as long as the account is open. If you open a five year CD at 0.50% APY, you will still earn 0.50% over four years and 11 months.

It is possible to find a bank that requires low minimum deposits on CDs, if any. But for the most part, minimum deposits are relatively high, typically thousands of dollars. You also can’t add more money to your CD later on, like you can with a savings or money market account. You place your opening deposit in the account and let it sit until the end of the term.

You can earn a higher rate on a CD than on a savings or money market account, especially for longer terms. You will likely get a better rate if you go with an online bank, like Synchrony or Marcus from Goldman Sachs, than with a large physical bank.

How to choose the right account

First ask yourself how long do you think you will 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 a money market account. If you are saving for a longer term goal, you may prefer a CD.

Then think about if you want a debit card and paper checks to access your money. If you like the idea, you might want a money market account. If you think you’ll be tempted to spend, a savings account may be best.

Finally, look for an account that does not charge a monthly service fee or allows you to easily waive it. You don’t have to pay a bank just to store your money.

Keep in mind that you don’t necessarily have to choose just one of these accounts. You can open two or even all three, if that makes sense for your savings goals.

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