Choosing the right type of savings account can be confusing. Are you better off with a certificate of deposit (CD)? A traditional savings account? A money market account (MMA)? In some ways, these three types of savings accounts are similar.
They're all taxable accounts you can open at a bank or credit union, and are protected by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA). Each account has pros and cons, and the right choice will be different depending on how much money you have and your personal needs.
- MMAs and CDs both offer higher interest rates than traditional savings accounts.
- MMAs typically have a higher initial deposit and monthly balance requirements than savings accounts.
- CDs require that you leave your money untouched for a fixed amount of time.
- The right choice for you depends on how frequently you need to access your savings, as well as how much you have to save.
Traditional Savings Accounts
These simple accounts are one of the most basic ways to bank your money. A savings account is a good choice for a young person’s first bank account, or for anyone who needs easy access to their cash. Most banks don’t require a large deposit to open a savings account.
Often $25 is sufficient. You may need to keep a minimum balance in the account to avoid a monthly fee, which can range from $25 to $1,000, depending on the bank and the account.
If your savings and checking accounts are with the same bank, you'll likely be able to easily transfer money between the accounts or use your savings account for overdraft protection. A linked savings account makes it especially easy to move money from your savings to your checking account.
You won’t be penalized for withdrawals from your savings account, but you won’t earn that much in interest either. One exception is a high-yield savings account, which offers significantly higher interest rates. These are typically at online-only banks and offer some of the best savings account rates.
Who Savings Accounts Are Good for
- Students and children beginning their relationship with a bank
- Anyone who wants unfettered access to their cash, without penalty
Small initial deposit required to open an account
Often no fees are charged when a minimum balance is maintained
Easy to transfer money to a linked checking account
Fewer penalties or limitations for withdrawals
FDIC or NCUA protected
Very low interest rates (often below the inflation rate)
Money Market Accounts (MMAs)
Another type of savings account, money market accounts (MMAs) are similar to traditional savings accounts but often require that you have more money to save. Typically, you’ll need a larger deposit to open the account—$1,000 is common—and will need to maintain a higher balance to avoid fees (this can be as high as $5,000); however, you’ll be rewarded with a higher interest rate.
Money market accounts are not the same as money market mutual funds, which are a type of investment vehicle.
Unlike traditional savings accounts, which pay a flat annual interest rate, many MMAs have a tiered interest rate, with higher rates for larger balances. This makes them desirable for those who are able to maintain a high daily balance in the account. Another perk offered by many MMAs is the ability to write checks from the account.
Who MMAs Are Good for
- Individuals with large amounts of cash to deposit, who don't need daily or weekly access to their money
Higher interest rates than a traditional savings account
Often have the ability to write checks
Withdrawals without penalty
FDIC or NCUA protected
Higher balance needed to avoid monthly fees
Limitation on the number of monthly withdrawals
Lower interest rates if balance drops out of higher tiers
Certificates of Deposit (CDs)
When you purchase a certificate of deposit (CD) from a bank, you are allowing the bank to use your money for a fixed period of time, which means you will face a steep fine for early withdrawals; however, the interest rates are higher for CDs than for traditional savings accounts or MMAs, making them desirable for those who can make large deposits without needing access to the money during the CD’s term.
Terms can be as short as a month or as long as ten years. You can find CDs with no minimum, but typically the required initial deposit is larger, often $1,000 or more.
Like with MMAs, higher balances on CDs tend to offer higher rates. CDs generally have fixed interest rates, but some banks offer variable-rate CDs as well. It's important to keep in mind that the particular bank you select and the length of your term can have a large impact on your interest rate. Shop around to find the top CD rates as they change frequently.
Who CDs Are Good for
- Individuals who do not need access to their money for several months to several years at a time
- Larger (or jumbo) CDs often get higher interest rates, so individuals with a larger deposit amount will see a better return
Higher interest rates than traditional savings accounts
FDIC or NCUA protected
Easy to open, with plenty of online options
Steep penalties for early withdrawals in some cases
What Are the Main Differences Between CDs and MMAs?
MMAs are similar to traditional savings accounts but often require a large deposit to open the account, such as $1,000. While they also demand a high minimum balance to avoid fees, they offer higher interest rates than savings accounts. CDs require owners to leave their money untouched for a fixed amount of time and usually pay higher rates than MMAs. Penalties for early withdrawal are steep.
Who Should Be Investing in MMAs or CDs?
MMAs are good for those with large amounts of cash to deposit, who don't need daily or weekly access to those funds. That's also true for those who may want to invest in CDs since the money will be tied up for several months to several years at a time.
Which Is More Liquid: A CD or a Money Market Account?
In general, a money market account is more liquid than a CD. In fact, many CDs have early withdrawal penalties attached to them, while money markets do not. That said, a CD will often pay a higher interest rate, because of its illiquidity.
The Bottom Line
When deciding if a traditional savings account, MMA, or CD is best for you, you’ll need to consider how much you can deposit initially, how frequently you will need access to your savings, and how much you’d like to earn in interest.
If you might need your money for bills or emergencies, a traditional savings account or MMA is the best choice. If you can afford to leave a larger sum of money untouched for a long stretch of time, a CD may be the better option.