CDs vs. MMAs vs. Savings Accounts

Photo illustration to accompany article on what types of bank accounts make sense for your savings strategy Getty Images
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If there’s one thing financial experts agree on, it’s the necessity of having savings on hand in the case of an emergency. Yet, as of 2021, 32% of Americans said that they would not be able to pay for an unexpected $400 expense, according to data from the Federal Reserve.

Building an emergency fund first requires intentional saving— even if you can only contribute a few dollars every month, it can add up over time. But that’s not the only consideration. You’ll also need a safe place to store that money and make sure you can access it easily when you need to. 

The kinds of bank accounts you keep may seem like a minor decision, but it does affect your financial health — not only in the rewards you may receive but how agile you can be if an emergency arises.

Here are the differences between three bank accounts commonly used for savings — savings accounts, money market accounts, and certificates of deposit — and how to choose the right one for you.

Traditional Savings Accounts

A savings account lets you safely store your money long-term. Like any bank account, a savings account is FDIC insured for up to $250,000, meaning your money will be safe even if the bank goes out of business.

Historically, Federal Reserve Board Regulation D limited you to six transactions a month, making it better for long-term savings rather than everyday spending. The regulation has been waived since the pandemic, but some banks still limit transactions. In exchange for keeping your savings with the bank, though, you’ll earn compounding interest on your deposit.

The exact interest rate, or APY (annual percentage yield), varies from bank to bank. Most brick-and-mortar banks will give you a paltry 0.01% APY for your savings account, but online banks and some credit unions offer significantly higher rates.

Pro Tip

A high-yield savings account can be a better way to earn a return on your savings than a traditional savings account. Interest rates are on the rise, and high-yield savings accounts today offer as much as 2% APY or more.

Who are savings accounts good for?

Anyone who has personal savings should get some type of savings account. It lets you keep your savings separate from your day-to-day spending and you earn interest on your money. Savings accounts are ideal for storing your emergency fund.

While savings accounts offer a lot of liquidity (meaning you can access your money easily), they typically have lower interest rates than CDs or investments. If you’re planning to save money for the long-term — such as saving for retirement or college — you might get better returns with IRAs, CDs, or a balanced investment portfolio. 

Pros and cons of a savings account

Pros

  • Earn compounding interest on your money

  • Higher liquidity compared to CDs

  • Your money is FDIC insured

Cons

  • Interest rates are comparatively lower than CDs or returns you can get investing

  • Some banks limit 6 transactions per month

  • Generally no ATM withdrawals, debit cards, checks, and other checking-account conveniences

Money Market Accounts (MMAs)

Money market accounts (MMAs) are best described as a cross between a savings account and a checking account. Like savings accounts, money market accounts let you securely store your money in an FDIC-insured account while earning interest. But money market accounts also offer some benefits of checking accounts, such as debit cards and check writing. Depending on the bank, money market accounts may have the same six transactions per month limit (not including ATM withdrawals) as savings accounts, so it shouldn’t replace your checking account completely. 

Money market accounts typically – though not always – have higher interest rates than savings accounts. The tradeoff is these accounts tend to require a larger minimum opening deposit. They also might require higher minimum monthly balances to maintain a high-interest rate or avoid fees.

Who are money market accounts good for?

Money market accounts are good for anyone who wants to earn interest on their money but also wants some of the conveniences not offered by a savings account, such as debit cards, check writing, and ATM withdrawals. Money market accounts typically require a higher minimum deposit than a savings account, so they may be better suited for those who already have some money saved up.

Pros and cons of a money market account

Pros

  • May have higher interest rates than savings accounts

  • Has functions of a checking account, like debit cards and checks

  • Your money is FDIC insured

Cons

  • Typically requires a higher minimum deposit than savings accounts

  • Some banks limit 6 transactions per month

  • May have higher minimum balance requirements than savings accounts

Certificates of Deposit (CDs)

Like savings accounts and money market accounts, certificates of deposit (CDs) are another type of FDIC-insured bank account. When you deposit money into a CD, you’re agreeing not to touch that money for a certain amount of time — the term of the CD. This makes CDs much less liquid than savings accounts or money market accounts, since you can’t withdraw your money without penalty until the CD has reached maturity.

“The majority of the time, the penalty is the interest you’ve earned up to that point in time,” says Chantel Bonneau, CFP, a wealth management advisor at Northwestern Mutual. “You [may be] better off with a three-year CD instead of a 10-year you broke halfway through.”

The most common CD terms are 1-year, 3-year, and 5-year CDs, although longer terms exist. The longer you agree to lock up money with your bank, the higher the interest rate you’ll receive. “With CDs, you’re getting potentially higher interest rates, and what you’re paying for is your time,” says Kimberly Zimmerman Rand, principal at Boston financial counseling firm Dragonfly Financial Solutions LLC.

In addition, the interest rate is generally fixed — meaning you lock in an interest rate when you open a CD, and it won’t change based on market conditions throughout the term of the CD. 

Who are CDs Good For?

CDs are useful if you have a lump sum of money you won’t need in the near future, but you also don’t want to risk investing in the stock market. If you’re saving for something with a known time horizon — like college, retirement, or a vacation — a CD can help you get a high return without much hassle, as long as you choose the right term length.

Some experts recommend creating a CD ladder strategy, which staggers CDs so returns and liquidity are balanced. Conversely, CDs aren’t a good choice for emergency funds or any savings you might unexpectedly need since you can’t access your money easily before the term is up. 

Pros and Cons of a CD

Pros

  • Typically have higher interest rates than savings accounts and MMAs

  • Interest rates are locked in when you open a CD and won’t fluctuate based on the market

  • Can help you avoid using your savings unnecessarily

Cons

  • Penalties for withdrawing your money before the CD reaches maturity

  • Must deposit a lump sum at the beginning; can’t add incremental savings

  • Hard to access your money before the term is up

Comparing Account Features

Savings AccountsMoney Market AccountsCDs
Typical minimum deposit$0$0-$500$500-$2,500
Typical APY*0.01%-0.10% (high-yield savings accounts may earn around 2% APY)1.00%-2.00%2.00%-3.50% (depends on term length)
Maximum number of withdrawals or transactions per month (without penalty)6, though can vary by bank6, though can vary by bank0 (before the CD has reached maturity)
FDIC Insured?YesYesYes
Debit card, ATM, and check-writing access?No (some exceptions)YesNo
*As of 8/4/2022

How to Choose the Right Account for You

Remember that you’re not limited to just one type of account. In fact, having a variety of accounts can add flexibility to your savings strategy. For example, you can open a CD to save for a house down payment while keeping your emergency funds in a high-yield savings account.

Many banks offer multiple types of accounts, allowing you to keep everything in one place, or you can shop around for the best rates. In addition to competitive interest rates, though, make sure the savings accounts, money market accounts, and CDs you consider also have the right account details and requirements to fit your goals.

Here are some things to consider when deciding which one is right for you:

  • What is your financial goal? If you are saving for an emergency fund,  your money is best kept in a savings account or money market account because you can withdraw those funds whenever you need to. On the other hand, if you’re saving for a goal tied to a definite timeline (like a vacation or home down payment), it may be worth looking into a CD. 
  • What is your savings timeframe? “The time span I normally talk about is five years,” says Rand. “If you have an idea in your head for uses of the money or if it’s an emergency fund, it should be in an FDIC-insured bank with liquidity. If it’s further out than five years, you can look into investing in taxable accounts or education or retirement.”
  • How often do you need the money? For everyday transactions, you’ll want a checking account. Savings accounts and money market accounts offer liquidity too, but are better suited for money you’ll only need to access occasionally or in case of emergency. Funds in CDs are locked up for a fixed amount of time and could cost you if you withdraw early.