What’s The Difference Between Savings Accounts, MMAs, And CDs?

If you want to reach your financial goals without going into debt, you start by saving money. However, unless your funds accrue interest, you’re not getting as much as you can from those funds. That’s why many people turn to savings accounts, money market accounts (MMAs), and certificates of deposit (CDs). 

These financial products can accelerate your savings with interest while protecting your money. Understanding each type of account can help you pick the right one for you, so keep reading to find out the difference between savings accounts, MMAs, and CDs.

What Are Savings Accounts?

Savings accounts are the most common type of bank account meant for holding your surplus cash. When you open a new account, you typically pay an opening deposit. 

You can deposit, transfer, and withdraw funds as needed, but you can only do so via electronic transfers or by visiting your local branch. In some cases, you can withdraw money from your savings account by using an ATM if your debit card is connected to a checking account.

Generally, you can only withdraw so many times from your savings account per statement period. If you do it more than that, you might be charged a penalty, highlighting how savings accounts are meant for long-term holdings, not regular transactions. 

Banks and credit unions offer interest on savings account funds in exchange for their customers’ patronage. Financial institutions deposit interest payments directly into these accounts every statement period, helping savers grow their wealth.

Some places require that you maintain a minimum balance and charge monthly service fees. Watch out for these extra charges because they can whittle away at your savings in the long-term.

What Are Money Market Accounts?

Also known as money market deposit accounts, these are interest-yielding savings products provided by many financial institutions. Unlike savings accounts, MMAs usually come with a checkbook or a debit card so that you can access these funds more easily.

Like savings accounts, MMAs are limited to six transactions (including transfers and withdrawals) each month. However, some transactions, such as ATM withdrawals or those made in-person at a branch, are exempt from this rule. Some banks may also have different limits, so ask to make sure.

MMAs once offered higher interest rates than savings accounts, but because the Federal Reserve lowered interest rates to almost 0%, they both yield similar returns. High-yield MMAs often require higher minimum balances or some other stipulation for savers to qualify for the best rate.

What Are CDs?

CDs are a financial product that lets you save money for different terms. When you get a CD, you choose the amount you want to deposit and the duration you want to hold it, such as six months, one year, three years, or five years.

After you open your account, you can’t tap the funds you deposited until the end of the term. If you make an early withdrawal, the bank or credit union will charge a penalty for it. Even though CDs have the lowest liquidity out of the three options, they typically have the most competitive interest rates to make up for this rigidness

CDs come with fixed rates for the life of the term. After you secure your interest rate, it won’t fluctuate, which is why these accounts are ideal for savers who want assurance that their rates won’t fall. But if market rates increase, the funds will be locked in at a lower rate, making long-term CDs a risky option.

Advantages And Disadvantages Of Savings Accounts, MMAs, and CDs

The best way to compare savings accounts, MMAs, and CDs is to weigh their pros and cons.

Savings Accounts

Advantages

  • A secure place for keeping your money, as they are typically insured by the FDIC and have high liquidity
  • Affordable fees and low minimum balance requirements, if any at all — even for high-yield accounts
  • Ease of access via ATM withdrawals

 

Disadvantages

  • Savings accounts have considerably lower interest rates than CDs
  • You can only withdraw funds so many times per statement period, or risk a penalty

 

Money Market Accounts

Advantages

  • Typically have higher interest rates relative to the average checking and savings accounts
  • Have good liquidity thanks to debit cards, online transfers, and checkbooks 
  • MMAs are FDIC insured

 

Disadvantages

  • Like savings accounts, MMAs have a limited number of monthly withdrawals
  • Generally have higher balance requirements compared to savings accounts and CDs
  • If you don’t maintain the minimum balance, the financial institution will charge a monthly fee

 

Certificates Of Deposit

Advantages

  • Best interest rates, which don’t fluctuate for the term
  • No extra charges or penalties unless you withdraw your funds before the end of the term
  • You can pick your preferred term length, and many banks give you several options to choose from

 

Disadvantages

  • Poor liquidity and accessibility, as you can only withdraw your funds if you break the term limit
  • Early withdrawals can result in penalties like reduced APYs 

 

Understanding the pros and cons and the features of each account will help you in your decision. As you compare, make sure you also compare multiple banks and credit unions to find the best rates and offers, so you know for sure that you’ll get the most out of your money.

 

Source
  • Wells, Libby. “Money Market Accounts Vs. Savings Accounts Vs. CDs.” Bankrate, 15 Dec. 2020, www.bankrate.com/banking/savings/money-market-vs-savings-accounts-vs-cds/.
Ian Schindler