- A savings or money market account could be a good place to keep your emergency fund.
- You might use a CD to save for a goal that’s a couple years away, like buying a house.
- Your choice between the three accounts will probably come down to when you’ll need your money.
- See Insider’s picks for the best high-yield savings accounts »
A savings account, money market account, and certificate of deposit are three places you can save your money. But how do you choose the best one for your situation?
Your right fit will come down to several details, including interest rates and how much you have for an opening deposit. The biggest factors will probably be when and how you want to access your money.
A savings account is a place to stash money you may need in the next couple years. It’s also a great place to store your emergency fund, or money you’ll need should you lose your job or your car breaks down unexpectedly, for example.
Savings accounts usually require a low minimum deposit. You can probably open one with $100 or less, and many don’t require an opening deposit at all.
Few savings accounts come with debit cards or paper checks, so you’ll want to find a way to access your savings quickly if necessary. In most cases, this means opening your savings account at the same bank as a checking account. This way, you can just transfer funds between accounts and spend the money almost instantly.
You’ll earn interest on a savings account, but the rate can change after you open it. Rates tend to increase when the economy is thriving and decrease when it’s struggling. Many banks pay low rates on savings accounts — the national average is 0.05%. But you can open a high-yield savings account at an online bank like Ally, Discover, or Capital One to earn significantly better rates.
Money market accounts work similarly to savings accounts. They’re useful tools for saving for relatively short-term goals. You’ll earn interest on your money, but the rate can change after you’ve opened the account.
Depending on the bank, you may need a low-to-medium minimum opening deposit. Some institutions don’t have a minimum deposit amount, while others ask for hundreds or even thousands of dollars.
The biggest difference between a savings account and money market account is how you access your money. With a savings account, you’ll probably have to transfer funds to a checking account. But money market accounts usually come with debit cards or paper checks, making it easier to spend your money. This means money market accounts are especially useful places to keep your emergency savings, because you’re able to access your money in a pinch.
You can find online money market accounts with high rates. Some of the most competitive accounts are with Axos, Sallie Mae, and CIT Bank.
A certificate of deposit is another type of savings tool, but it works differently than a savings or money market account.
You choose a CD term, such as six months, one year, or five years. You’ll deposit money into your CD and withdraw funds once the term ends. You can’t take out money early, unless you want to pay a fee.
You’ll earn interest on a CD, and unlike with a savings or money market account, that rate won’t change while the account is open. If you open a five-year CD at 0.50% APY, you’ll still earn 0.50% four years and 11 months down the road.
It’s possible to find a bank that requires low minimum deposits on CDs, or even none at all. But for the most part, minimum deposits are relatively high, usually thousands of dollars. You also can’t add more money to your CD later, as you can with a savings or money market account. You park your opening deposit in the account and let it sit until the term ends.
You may earn a higher rate on a CD than on a savings or money market account, especially for longer terms. You’ll probably earn a better rate if you go with an online bank, like Synchrony or Marcus by Goldman Sachs, than with a large brick-and-mortar bank.
Here are the main differences between savings accounts, money market accounts, and CDs. These are general rules of thumb, but keep in mind accounts vary by institution. For example, this table indicates that most CDs require high minimum deposits — but banks like Ally and Capital One don’t have minimums.
Still not sure which account is your best fit? Here are the pros and cons to each type:
Pros and cons of savings accounts
Pros:
- Variable interest rate. Your interest rate can change after you’ve opened the account. If the bank increases its savings rate, you benefit from a higher rate.
- Transfer money to checking. It’s relatively easy to access your savings. You just have to transfer money to a checking account. If that checking account is with the same bank as your savings account, you should be able to spend the money almost instantly.
- Low minimum deposit. Many banks don’t even require a minimum amount to open a savings account. Of those that do, it’s usually $100 or less.
Cons:
- Variable interest rate. If your bank lowers its savings rate, you don’t get to keep the rate you originally received when you opened the account. Your rate will decrease, too.
- No debit card or checks. Yes, it’s relatively easy to access your money with a savings account. But it isn’t as easy as with a money market account. You don’t usually get a debit card or paper checks with your savings account.
- Monthly fees. Many banks charge monthly service fees on savings accounts. You may be able to waive them if you maintain a minimum balance of $500, for example. There are also plenty of online banks that don’t charge monthly fees.
Pros and cons of money market accounts
Pros:
- Variable interest rate. Your rate can change even after you’ve opened the money market account. So if the bank increases its rate, your rate goes up, too.
- Debit card or checks. Most money market accounts include a debit card and/or paper checks. This makes it super easy to access your savings, which is useful for an emergency fund.
Cons:
- Variable interest rate. The downside of a variable interest rate is that if the bank lowers its rate, your rate also goes down.
- Temptation. You may find that having a debit card or checks makes it too easy to spend your hard-earned savings. If this is the case, you may prefer a savings account.
- Medium minimum deposits. It’s common for banks to require hundreds or even thousands to open a money market account. If you can’t afford the minimum deposit, a regular savings account will be the better choice.
- Monthly fees. Many institutions charge monthly service fees. You may qualify to waive the fee, though, or you can find a money market account that doesn’t charge fees.
Pros and cons of CDs
Pros:
- Fixed interest rate. Your rate doesn’t change once you’ve opened the CD. So if the bank’s rates drop, you get to keep your higher rate. This is especially useful during the coronavirus pandemic, when many banks have been decreasing their rates in response to the struggling economy.
- Higher rates on longer terms. For the most part, banks pay higher rates on longer-term CDs. So you may be able to lock in a better rate than you’d get with a savings or money market account.
- No monthly fees. Banks rarely charge monthly maintenance fees on CDs.
Cons:
- Fixed interest rate. The downside of a lock-in rate is that if the bank’s rates go up, you’re stuck with your lower rate. This may not be a problem for a six-month or one-year CD, because US rates will likely stay low for a while as the pandemic continues. But rates might be higher in five years, so opening a longer-term CD could be riskier. Keep in mind, you won’t lose money in a CD as you might in the stock market. You only risk not earning the highest rate.
- Lower rates on shorter terms. A bank may pay a lower rate on a six-month CD, for example, than on a savings or money market account.
- No early withdrawals. With savings and money market accounts, you can withdraw cash when necessary. But you’ll pay a penalty to take money out of your CD before the term ends. And most banks won’t let you make partial deposits — it’s all or nothing.
- Can’t deposit money later. Once you’ve opened your CD, that’s it. You can’t deposit more money throughout the term to earn more in interest.
Which account is best during the COVID-19 pandemic?
Many Americans have shifted how they think about their savings during the coronavirus pandemic. So which of these three savings tools is the best option right now?
You probably want easy access to your cash during the pandemic. If you’re one of numerous Americans who loses work, you’ll need to tap into emergency savings to cover necessary expenses. You could also face a huge, unexpected hospital bill if you or a family member falls ill.
This means a savings or money market account is likely the better choice these days. If you have an emergency and need to withdraw funds from a CD early, you’ll pay an early withdrawal penalty.
But depending on your situation, you may still want to open a CD— especially if you already have a fully-funded emergency fund in another account and want to save for another goal. For example, maybe you want to buy a house in a couple years. You could open a 2-year CD and earn a guaranteed rate of return without risking your house savings in the stock market.
First, ask yourself how soon you expect to need this money. Could it be any day now, or at the drop of a hat like with an emergency fund? If so, you probably want a savings account or money market account. If you’re saving for a longer-term goal, you might prefer a CD.
Then think about whether you want a debit card and paper checks to access your money. If you like the idea, you may want a money market account. If you think you’ll be tempted to spend, a savings account may be better.
Finally, search for an account that either doesn’t charge monthly service fees or makes it easy for you to waive them. There’s no need to pay a bank simply for storing your money.
Keep in mind, you don’t necessarily have to choose just one of these accounts. You can open two or even all three, if it makes sense for your savings goals.
Laura Grace Tarpley is the associate editor of banking and mortgages at Personal Finance Insider, covering mortgages, refinancing, bank accounts, and bank reviews. She is also a Certified Educator in Personal Finance (CEPF). Over her four years of covering personal finance, she has written extensively about ways to save, invest, and navigate loans.