CDs vs. Money Market Accounts: Understanding Your Options

Finding ways to save more money should always be a financial priority. However, you can only trim expenses so much before it feels like you’ve cut all the fun out of life. Luckily, boosting your savings doesn’t have to be so drastic. Instead, it all comes down to how you save – not necessarily how much you put aside.

For example, take a moment and glance at your account balances. Do you have a decent amount of money sitting in your savings or checking account(s)? If so, your savings strategy might be amiss – and it could be costing you.

Common Savings Challenges

Yes, market-based investments, such as stocks and bonds, have the potential for higher returns. However, many short- to mid-term goals are better met without market risk. For example, when saving for a family vacation or building your emergency fund, putting money aside in a savings or checking account is convenient. But it does create two common pitfalls:

  • Lack of Organization:

Stashing away money for various purposes in two general accounts can make it difficult to know which funds are earmarked for specific goals. It’s also very easy to access these funds at a moment’s notice – increasing your chances of spending frivolously.

  • Minimal Returns:

Traditional savings and checking accounts generally offer lower dividend rates – meaning you’re likely leaving money on the table.

Fortunately, two powerful yet often overlooked investment accounts could boost your savings significantly: Money Market Accounts and Certificates of Deposit.

Understanding how these accounts work could dramatically shift how you save – and how much you earn.

What are Certificates of Deposit?

A certificate of deposit (CD) is an investment account with much higher earning potential than a traditional savings account. While you can add and withdraw money regularly from a savings account, your money is locked in for a designated period or term with a CD. 

In exchange for locking up your money in a CD, you earn significantly higher investment yields. For example, you’ll often see certificate rates and terms presented in the following fashion:

Certificate of Deposit TermAPY or Dividend Rate
12 Months1.25%
24 Months1.75%
36 Months2.15%
48 Months2.65%
60 Months3.25%

During the term of your CD, you cannot withdraw your funds without incurring a penalty or fee. Typically, you’ll forfeit a portion, or all, of the interest earned to date.

While this might seem too restrictive to some, these investments are designed to force you to save. Without access to this money, your savings will continue to grow, and you’ll benefit from compound interest throughout the CD’s term.

Additionally, certificates offer fixed interest rates, meaning you’ll continue to earn the same yield throughout the term of your investment. There are usually minimum deposits to open CDs, such as $500 or $1,000.

Ideal Uses for Certificates of Deposit:

Certificates can be used as general investment tools or to help organize savings goals. For example, if you have several short-term goals, you can open a different CD for each based on the timeframe of your objective.

Common uses include:

  • Short-term goals: Saving for a family vacation, a new car, or building an emergency fund.
  • Mid-term goals: Putting money aside as a down payment on a new home.
  • Long-term goals: Starting a college savings plan for your child or adding more conservative investments to your retirement plan.

What are Money Market Accounts?

It’s helpful to think of a money market account as the middle ground between a traditional savings account and a CD. While your money is not locked in as with a certificate, you are limited in how often you can withdraw funds from the account (usually up to six withdrawals per month).

Money market accounts are extremely versatile and earn variable rates based on the balance in your account. For example, you’ll usually see money market rates in a tiered format, like the following:

Money Market Account BalanceAPY or Dividend Rate
$0 – $999.990.00%
$1,000.00 – $2,499.990.75%
$2,500.00 – $9,999.991.35%
$10,000.00 – $24,999.991.85%

Like a certificate, money market accounts generally have a minimum balance required before you will earn interest. If your balance falls below the minimum at any time, you will not earn interest until the balance is brought back above the minimum threshold.

Unlike CDs, the interest rates on money market accounts are variable – meaning they will fluctuate with the economy. This feature is great when interest rates are rising, as you will automatically benefit when rates adjust higher.

Lastly, you can access the money instantly without fees or penalties (typically up to six times per month). Withdrawals can be made at any branch location, ATMs, or by transferring funds through online or mobile banking.

Ideal Uses for Money Market Accounts:

Money market accounts are one of the most versatile and beneficial financial accounts. They’re often labeled as super-powered savings accounts. You can access the money immediately as needed, just like a traditional savings account. However, your money will grow faster thanks to higher earning yields. It’s a win-win.

It’s this versatility that makes these accounts the ideal candidate to house your emergency fund.

Many financial institutions will also allow you to link your money market account to your checking account as a form of overdraft protection. If you don’t have funds in your checking account to cover a transaction, it will pull from your money market account to cover the outstanding amount.

The Hybrid Approach:

There is no rule that says you cannot use a combination of both CDs and a money market account. For example, a money market account is an excellent option to hold your emergency fund. But you might also use higher-yielding CDs for specific financial goals.

The bottom line: If you have excess funds sitting idly in your traditional savings or checking account, you’re likely missing out on significant earning potential available through money market accounts and CDs.

We’re Here to Help!

How you choose to save money can be just as important as how much you’re able to put aside each paycheck. As a member, you have access to various financial tools that can help you earn and save more.

If you’re interested in learning more about certificates of deposit or money market accounts, we’re ready to help. Please stop by any of our convenient branch locations or call 801-451-5064 to speak with a team member today.

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