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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The sands have shifted beneath our feet. 

Due to the effects of COVID-19, unemployment has risen to record highs, the federal government has declared a recession, and people are more cautious than ever about spending money. With so much uncertainty, you may be wondering what you should do with your savings.

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.

We asked experts for their advice on savings strategy and which bank accounts—savings accounts, money market accounts, and certificates of deposit—are most useful now. 

Here are the questions you should be asking.

What Is the Interest Rate?

This is one of the most important things to consider: what kind of returns would you be getting? 

We have evangelized about online banks a lot on NextAdvisor, because they are one of the best ways to get an above-average APY (annual percentage yield) for your money. 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. Interest rates are low across the board due to the Federal Reserve cutting rates in March, but you can still find high-yield savings accounts (primarily online) with APYs around 1.00%.

Money market account rates are also lower than usual and may not be as competitive against high-yield savings accounts as they normally would be. We recommend checking rates from multiple banks to see what works best for you.

Pro Tip

Interest rates are an important determining factor in what bank account you choose, but they’re not the only consideration. Figure out what your savings goals and needs are before opening an account.

You could score a high APY with a CD, or certificate of deposit, but you’ll have to give up your money for a set amount of months in exchange. “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. The longer you agree to lock up money with your bank, the higher the interest rate you’ll receive. CD interest rates are low now, too. 

If you choose the CD route, experts recommend creating a ladder strategy, which staggers CDs so returns and liquidity are balanced. 

What Is Your Financial Goal?

Knowing what you plan to use your savings for is key in understanding where it should go. Not every account fulfills the same needs. For example, 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. 

“An emergency fund typically isn’t a very good option for CDs,” says Mark Wilson, president of MILE Wealth Management LLC, a fiduciary financial planning firm in Irvine, CA. “You’ll typically pay a good-sized penalty if you need to take the money out early. That can eat up a lot of the interest you’ve earned.”

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. The longer the term, the higher the interest rate will be. 

What Is Your Time Horizon?

In other words: When do you envision using this money? 

“The time span I normally talk about is five years,” Rand says. “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 farther out than five years, you can look into investing in taxable accounts or education or retirement.”

Assuming a time span of five years or less, a savings account, money market account, or CD would work for your needs. Most banks have CDs with terms extending past five years, with some going as long as 10 years, though you’ll need to weigh the locked-in interest rate with potential market returns and your liquidity needs. Be realistic about the amount of time you want to keep funds in CDs.

“The majority of the time, the penalty is the interest you’ve earned up to that point in time. You [may be] better off with a three-year CD instead of a 10-year you broke halfway through,” says Chantel Bonneau, CFP, a wealth management advisor at Northwestern Mutual. “Just be clear on those terms and know, in exchange for not having market volatility, you’re usually giving up some upsides.”

How Often Do You Need the Money?

If you find yourself dipping into your funds more than six times a month, it’s best to use a checking account. Savings accounts and money market accounts are subject to Regulation D, limiting you to six convenient monthly transactions, including online transfers and automatic bill payments. CDs wouldn’t be a good bet here either, because those funds are locked up for a fixed amount of time and would cost you if you withdrew early.

How Much Do I Have Saved?

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 deposit to open the account. Many savings accounts, especially online savings accounts, have no minimum deposit, while money market accounts can require anywhere from $100 to $5,000 to open. These same accounts may also require minimum monthly balances to maintain a high-interest rate or avoid fees. 

NextAdvisor reporter Kendall Little contributed to this article.