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)? Each has pros and cons, so read on and choose the right option for you. 

Traditional Savings Account

These simple accounts are one of the most basic ways to bank your money. They're a good choice for a young person’s first savings 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. Typically, you will need to keep a minimum balance in the account to avoid a monthly fee. The minimum amount can be anywhere between $25 and $1,000, depending on the bank and the account. If your savings and checking accounts are with the same bank, chances are you can easily transfer money between the accounts, or use your savings account for overdraft protection. You won’t be penalized for withdrawals from your savings account, but you won’t make much interest either.

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

Pros

  • Small deposit fee required to open an account

  • No fees when minimum balance is maintained

  • Easy to track your account activity

  • No penalties or limitations for withdrawals

  • FDIC protected

Cons

  • Very low interest rates (often below inflation)

Money Market Account (MMA)

MMAs are similar to savings accounts, but work with bigger numbers. 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 $10,000), but you’ll be rewarded with a higher interest rate. Unlike traditional savings accounts, which pay a fixed 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, but this is counterbalanced by limitations on the number of withdrawals permitted each month.

Who MMAs Are Good For

  • Individuals with large amounts of cash to deposit, who don't need daily or weekly access to their money.

Pros

  • Higher interest rates than a traditional savings account

  • Often have the ability to write checks

  • Withdrawals without penalty

  • FDIC Protected

Cons

  • High balance needed to avoid monthly fees

  • Limitation on the number of monthly withdrawals

  • Lower interest rates if balance drops out of higher tiers

Certificate of Deposit (CD)

When you purchase a CD, 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 much 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 three months, or as long as five years. The longer the term, the higher the interest rate. You can buy a CD for as little as $100, but typically the initial deposit is larger, often $1,000 or more. Higher balances tend to offer higher rates. CDs generally have fixed interest rates, but some banks offer variable-rate CDs as well. 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.

Pros

  • Higher interest rates than traditional savings accounts

  • FDIC protected

  • Easy to open, with plenty of online options

Cons

  • Steep penalties for early withdrawals in some cases

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. 

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 make in interest. If funds are tight, and 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 is the better option.