What is the Difference between a CD and a Money Market Account?

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What is a Certificate of Deposit (CD)?

A certificate of deposit (CD) is a low-risk, timed deposit account, meaning that you deposit money into it and you cannot touch it until a certain date. CDs have a minimum investment requirement – which varies by institution – and pay a fixed or variable rate of interest towards that amount. You can also buy CDs for a variety of time periods, from just a few months to five years or even more. Most people open CDs at their banks or credit unions, but you can also open a CD through a brokerage firm. 

There’s no risk of loss associated with opening a CD and it will earn interest, so you are virtually guaranteed to earn money. One of the drawbacks of CDs, however, is that they aren’t liquid. If you need to access your money before your CD matures, you can either withdraw it early or take a loan against it, but there are penalties that could take away from your initial investment. If you take out a loan against the CD, you will, of course, need to repay the loan with interest.

What is a Money Market Account?

A money market account is an alternative to a savings account. But, instead of depositing however much you can spare like you would a normal savings account, with money market accounts require you to deposit more and maintain a higher balance overall. The biggest advantage of this is that a bank will give you a higher interest rate, which will get you more money in the long run. 

Additionally, money market accounts are relatively liquid, unlike a CD. You can write checks against your account, but the number of checks that you can write per month is limited to around six depending on the institution. If you exceed that number, your bank will switch your account over to a traditional checking account.

What are the Differences Between CDs and Money Market Accounts?

The biggest difference between a CD and a money market account is the liquidity factor. With a money market account, you can easily access money if you need it, and you can also add money. But, with a CD you can’t withdrawal or deposit funds into it (at least not without opening a new CD or incurring some penalties.)

Another difference is the interest rate associated with the two. CDs typically have a much higher interest rate than money market accounts. And while money market accounts have higher interest rates than normal savings accounts, they don’t come close to the interest rate of a CD. Institutions are much more comfortable giving high-interest rates to CDs because they are guaranteed to have your money for longer. 

Is a CD or Money Market Account Better?

Like most of these types of questions, it really depends on your financial situation and the goals you have for it. If you can afford to keep a sum of money tied up for a while, it may be worth considering opening a CD. But, if you’d like to save money, but also have access to it in case of an emergency, maybe a money market account is right for you.

Ultimately, finding out which one is better for your financial goals is up to you. If you need help finding out which one is right for you, we recommend speaking with a trusted financial advisor.

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