Savings Vs. CD Vs. Money Market: Which Offers The Best Rates?

Earning a high interest rate on your savings deposits can help your money grow faster. And it’s a good incentive to open a new account.

Savings accounts, certificates of deposit and money market accounts can all be solid options for growing your money, but they aren’t identical. Understanding these three types of accounts and the interest rates they may pay can help you decide which is best for your money.

What Is a Savings Account?

A savings account is a deposit account found at banks and credit unions that you can add money to regularly. You can link this type of account to other accounts, such as a checking account. Savings accounts are available at traditional banks, credit unions, and online banks. The interest rate depends on where you do your banking and the type of savings account you open.

For example, brick-and-mortar banks generally offer regular savings accounts, often earning a low interest rate. Online banks, on the other hand, often provide high-yield savings accounts. You’ll also find savings accounts for kids and specialty savings accounts, such as a Christmas Club account.

Banks and credit unions typically limit the number of withdrawals and transactions you can make per month from a savings account to six. These accounts usually don’t offer an ATM card, debit card or checks. Instead, you can withdraw by transferring funds to a linked checking account or a branch if you save with a traditional bank.

What Is a Money Market Account?

A money market account (MMA) is a deposit account found at banks and credit unions. These accounts are somewhat of a hybrid between checking and savings accounts. Like a savings account, MMAs generally pay interest. Like a checking account, MMAs often come with a debit card, ATM card or check-writing capabilities to make accessing your money more convenient. Withdrawals and transactions are generally limited to six per month. Anything over that number and the institution may charge an excess withdrawal fee.

Don’t confuse a money market account with a money market fund. A money market fund is an investment product offered by traditional and online brokerages similar to other mutual funds.

What Is a Certificate of Deposit?

A certificate of deposit is a time deposit account. When you open a CD account, you’re saving money in that account for a set period. Your savings will earn interest at a fixed rate. You can withdraw your initial deposit and the interest once the CD matures. Or, you could choose to roll the total amount over into a new CD.

Taking money out of a CD before it matures could trigger an early withdrawal penalty, causing you to forfeit some or all of the interest earned. A CD ladder strategy could help you to avoid that scenario. Laddering CDs means opening multiple CD terms with different maturity dates, and each CD may also earn a different interest rate and APY. By laddering CDs, you can maximize your interest earnings while avoiding early withdrawal penalties.

How Do Banks Set Interest Rates for Savings Accounts, CDs and Money Market Accounts?

Before digging into which savings option offers the best rates, it’s helpful to understand how rates are set in the first place.

Banks use a benchmark rate to determine the interest rate and annual percentage yield they pay on interest-bearing deposit accounts. This benchmark rate is typically the federal funds rate, which, in simple terms, is the interest rate at which banks lend money to other banks on an overnight basis.

While the rates paid by savings accounts, CDs and money market accounts are not tied directly to this rate, they are influenced by its changes.

When the Federal Reserve raises the federal funds rate, as it did throughout 2022 and much of 2023, banks and credit unions typically increase the rates they offer on savings accounts, CDs and money market accounts. Rate increases can happen if the Fed is attempting to rein in an economy that’s growing too quickly.

On the other hand, when the Federal Reserve cuts the federal funds rate, banks may reduce the interest rates they pay to savers. Interest rate cuts, like the one that occurred in early 2020 as a result of the coronavirus pandemic, typically happen when the Fed is attempting to encourage consumer spending and stimulate the economy.

Savings Account Interest Rates

The Federal Deposit Insurance Corporation (FDIC) tracks the national average savings account interest rate. As of November 2023, the national average savings account rate was 0.46%, according to data from the FDIC. So if you were to deposit $1,000 into a savings account at that rate and leave it there for one year—without making any new contributions—you’d earn $4.60 in interest.

That doesn’t sound like much, but this is the average national rate. Individual banks and credit unions may offer interest rates on savings accounts that are higher or lower than this average.

The rate you earn with a savings account can depend on what type of savings account and where you bank. If you open a savings account at a traditional brick-and-mortar bank, your interest rate will likely be lower. But a high-yield savings account at an online bank, on the other hand, could come with a much more competitive rate.

For example, you may find online banks offering an interest rate and APY of 4.00% or more on savings accounts. Online banks can often pay savers higher interest rates because they have lower overhead costs than traditional banks. They pass those savings on to their customers in the form of competitive rates.

Interest Rates for CD Accounts

Certificates of deposit accounts are time deposits, which sets them apart from regular savings accounts. With a savings account and money market accounts, you can make withdrawals monthly, up to the limit specified by the bank. CDs require you to leave the money in the account until the CD matures. Once that happens, you can withdraw your initial deposit and the interest earned or roll the total amount into a new CD.

Since you agree to leave your money with the bank for a set term, you may get a higher interest rate on a CD than on a savings account. Generally, banks assign higher interest rates for longer CD terms and lower rates for shorter CDs. There are some exceptions to this rule, however. For example, some banks offer special promotional CDs with 11-month or 13-month terms that carry higher interest rates than 36-month or 60-month CDs.

In most cases, the interest rate you earn on a CD is fixed for the entire CD term. But you may be able to increase your rate by opening a step-up or bump-up CD. With a step-up CD, the bank will automatically increase the interest rate on your CD once during the CD term if interest rates for similar CD products rise. A bump-up CD allows you to request a rate increase once (and sometimes twice) per term if interest rates on similar CDs rise.

Money Market Account Interest Rates

Money market accounts can combine features of both savings accounts and checking accounts. For example, you can earn interest on savings and potentially access your money using checks or a debit card. But withdrawals aren’t unlimited, and your bank may apply a fee for making excess withdrawals each month.

Money market accounts may offer slightly higher interest rates than savings accounts. Again, it’s important to remember that this is a national average and that some banks can offer higher rates for money markets. Typically, these are online banks rather than brick-and-mortar banks, although some credit unions’ rates also may be competitive.

While money market accounts can offer higher interest rates than savings accounts, they can also have higher minimum deposit requirements. For example, you may be able to open a savings account with $100, but your bank may require a $1,000 deposit or even a $10,000 deposit for a money market account.

CD vs. Savings vs. Money Market

Whether a CD, savings or money market account, the right type of account for you depends on your savings needs and goals. Some accounts offer more access to your money, while others offer higher interest. But all of these accounts provide safety. If you have a CD, savings account or money market account at an FDIC member bank, you’re covered up to $250,000 per depositor, per account ownership type, per financial institution. The National Credit Union Administration (NCUA) offers the same protection at credit unions.

So, what type of savings account do you need? Breaking down how each account compares can help you decide which ones might suit you best.

Money Market Account vs. Savings Account

You can use money market accounts and savings accounts for the same types of goals. For example, you could use either one to:

• Grow your emergency fund
• Save money for a vacation
• Put aside funds for a down payment

The main difference is the ease of access to your money.

Money market accounts often, but not always, come with a debit card, ATM card or checks, and those are options you typically don’t get with a savings account.

CD vs. Savings Account

You can use a CD to save for financial goals like a savings account. Unlike savings accounts, you can’t withdraw money from a CD until it matures without paying a penalty. Some banks and credit unions offer no-penalty CDs, which allow you to make penalty-free withdrawals. But these types of CDs are not as common.

As far as rates go, CDs have the potential to pay more interest on your money than savings accounts. Banks and credit unions may offer higher rates on CDs in exchange for less liquidity—you’re expected to leave it alone for months or years. The highest CD rates are usually reserved for the longest-term CDs. If you need more flexibility, you may be better off choosing a savings account.

Money Market Account vs. CD

Money market accounts offer far more liquidity than CDs, allowing you to make a limited number of withdrawals and transactions per month. Unless you go over the allowed limit, you won’t get hit with a penalty for making withdrawals, as you would with a CD.

It’s important to compare money market accounts and CDs side-by-side to see where you’ll earn the most interest.

Also, consider the monthly fees you might pay for a money market account. You may get charged a minimum balance or monthly maintenance fee with money market accounts, but generally not with CDs. Fees can eat into your overall interest earnings on an account.

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Can You Earn More Interest With Jumbo Accounts?

Some banks offer jumbo versions of savings accounts, money market accounts and CD accounts. These accounts tend to have a minimum deposit requirement of $100,000 or more.

Compared to regular savings accounts, CDs or money markets, jumbo accounts sometimes offer better rates. This is the institution’s way of rewarding you for saving larger amounts of money. However, it’s essential to remember that higher rates are not always guaranteed.

Where Is the Best Place to Save to Earn Interest?

Whether it makes sense to open a savings account, money market account or CD to earn interest depends on your goals and how much access you need to your money.

With savings accounts, you’re likely to find the best interest rates at an online bank. Since it’s an online bank, the trade-off is that you won’t have access to a branch. If you want to make deposits or withdrawals, you’ll have to do those through online or mobile banking unless the bank offers ATM access. Credit unions are also good places to look for high-yield savings accounts. These member-owned institutions often reward members with high rates and low fees.

Money market accounts can offer higher rates than regular savings accounts and, in some cases, outpace high yield savings accounts—look for these accounts at online banks and credit unions. When comparing money market accounts, it’s essential to check minimum deposit requirements, minimum balance requirements and ways to access your account. For example, if you want the convenience of check-writing or a debit card, that will require you to narrow your focus since not all money markets offer them.

CD accounts are typically best for the money you don’t plan to use soon. For example, if you’re building emergency savings, you’d be better off leaving it in a savings account or money market account. But if you’re saving money for a down payment on a home that you plan to buy in a couple of years, a CD could be a good fit.

Bottom Line

Earning interest is a great reason to save money in a savings account, CD or money market account. But remember that interest rates are only part of the picture when choosing where to save money. You should also consider any fees the bank or credit union may charge, such as monthly fees, paper statement fees, excess withdrawal fees or early withdrawal penalty fees for CDs. Even a monthly maintenance fee of as little as $5 could take away from the interest you’re earning if you open a savings or money market account with a lower rate and APY.

Finally, consider what the institution offers to help you manage your account and keep it secure. Features such as a user-friendly mobile app, mobile check deposit and multi-factor authentication can make managing your savings easier while protecting your online banking information.

Frequently Asked Questions (FAQs)