Certificate of Deposit vs. Money Market Account: What’s the Difference?

The CD vs. money market debate has endured for a long time. CDs, short for certificate of deposits, and money market accounts both have their advantages and disadvantages, so it can be confusing if you’re unfamiliar with the details of each type of deposit product.

It’s for this reason that some choose to simply work with both to get the most out of their money. However, if investing in both options isn’t the strategy you want to take, you’ll have to make an informed decision about which route is best for your bottom line. A good way to get this done is by simply comparing the features of each deposit account.

What Is a Certificate of Deposit?

A certificate of deposit is an investment tool that allows financial institutions to essentially borrow your deposited money for a predetermined period of time, which can span months and even years. In exchange for your loan to the bank, banks and credit unions give you the promise of earned interest through CD rates.

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When you purchase a CD, you’ll know how long it will be held, as well as how much money is required to open an account. Usually, the return isn’t as substantial as higher-risk ventures like the stock market, but certificate of deposit rates are typically higher than traditional savings accounts and this option is safer than dabbling with stocks. Additionally, most financial institutions that offer CDs are federally insured for up to $250,000 by the FDIC or the NCUA.

While all this sounds overwhelmingly advantageous, there is a huge condition that you’ll have to abide by to earn returns through CDs. Since certificates require a fixed term, financial institutions can penalize you for withdrawing funds from the account before it completely matures; this can be an issue, especially for those who have an emergency expense come up and need cash immediately.

Money Market Account Basics

A money market account is also typically enjoyed for its low risk. With money market accounts, a higher initial deposit is usually required starting anywhere from $10,000 and up. The approach here is that to earn a higher return you have to invest more money, while a certificate of deposit allows you invest closer to $1,000 to start, but requires a longer period of time to get the best interest rates.

Another difference is that, unlike CD accounts that lock in your deposit, you’ll have greater access to money market account funds and can make multiple deposits while the account is active. This makes a money market account operate similarly to a basic savings account, except that it requires a higher opening deposit and offers highly competitive interest rates.

If you think that both the money market account and CDs seem like interesting investments, then it could be worth trying both, or combine them with other investments in a portfolio. This way, you can benefit from a high level of diversification that has a greater chance at giving you the returns you want.

About the Author

Jennifer Calonia is a personal finance journalist covering topics about banking, consumer savings, loans and debt. Her features and helpful savings tips encourage and empower households across America to achieve financial balance.