Difference Between a Money Market Account and CD

What can you do with your cash when it isn't actively being invested? As investment vehicles, both money market accounts and certificates of deposit (CDs) have significant advantages and disadvantages. Your individual needs determine which type of investment account is right for you. Determine your individual needs and then weigh the differences between the two to determine which is the right type of investment vehicle for you.

Earning Potential

When it comes to wanting to know exactly how much you'll earn from your money, CDs are the way to go. Because they are locked in for a specific time period, you can easily calculate how much you'll earn. With money market accounts, these function more as a backup checking or savings account, which means you can easily withdraw your money or deposit more, thus making it difficult to determine exactly how much your money will be making for you.

Time Span

Money market accounts are opened for an unlimited time span. It is a great place to put emergency funds or funds for items paid periodically, like college tuition. CDs, on the other hand, lock your money in for a set time period. The basic CD time deposit ranges between 6 months to 5 years.

Access

While most money market accounts have restrictions on the number of transactions that may occur each month, your money is virtually always accessible to you. With CDs, if you withdraw money before maturity, you will lose a percent of your interest and may pay a penalty.

Interest Rates

CDs offer the highest interest rates (for longer maturities) than any other bank product. The longer the maturity, the higher the interest rate. Money market accounts are disproportionately skewed to wealthier investors. While interest rates are typically good, they are directly proportional to the amount of deposited assets.

Conclusion

If you don't mind locking in your money for a specific time period with a higher interest rate, then a CD would be to your advantage. However, if you need quick access to your money and don't want to pay penalty fees, keep your assets in a money market account.