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The Differences Between a CD and a Money Market

When it comes to saving money, you have several options, including standard savings accounts, money markets and certificates of deposit (CDs). These different accounts offer various benefits to help you effectively save your money. Putting your savings in the right place can significantly impact how your money grows over time.

CDs and money market accounts are similar in that they let you save your money with higher interest rates than typical savings accounts. Learn what makes them different and which is best for your financial needs below.

CD vs. Money Market

Where and how you save your money will impact your savings over time. For example, the interest rate alone can pay a lot to your savings based on the market. When considering how you want to save your money, you want options that offer competitive interest rates and the option to access your savings if needed. Each person has different savings needs — while one person may not want the option to touch their savings, another may anticipate needing access to it.

CDs and money market accounts are federally insured savings accounts available at many banks and credit unions. Understanding the difference between CD and money market accounts is important for finding the most effective way to build your savings. While CDs and money market accounts offer ways to build savings and accrue interest, these accounts have several differences that can make one better than the other in certain situations.

CD Overview

Certificates of deposit lock in your savings at fixed interest rates for a set term, typically between a few months to several years. Long-term CDs often have higher interest rates than short-term CDs.

CDs make it more difficult to access your money. Once your money is put in a CD, it's essentially locked in to earn interest. If you withdraw from your CD before the term ends, you'll face penalties, sometimes equating to as much as your earned interest. While these accounts don't offer as much flexibility, they're a reliable source of fixed interest if you can avoid tapping into the funds.

Money Market Overview

Money market accounts offer the competitive interest rates of a savings account with the flexibility of a checking account. While the interest rates are typically lower than CDs, they'll still boost your savings. Money market rates are generally variable rates, which rise and fall with the market.

Unlike CDs, money markets allow you to access your savings. You can typically access your savings a few times a month, without incurring any fees or penalties, though there's a limit to the number of times. How often you can withdraw from your money market account varies between banks. For example, some banks may allow you to withdraw from your money market account no more than six times a month.

You'll have the ability to request a debit card or checkbook to access your funds. These accounts work similarly to checking accounts and standard savings accounts, though they often have higher minimum balance requirements than standard savings accounts. These accounts offer increased flexibility, which is helpful if you anticipate needing to cash out some of your savings.

CDs and money market accounts are both great options for saving money, though one may be more suitable than the other for your unique financial situation.

When to Open a CD Account

Here are three situations when a CD account may be right for you.

1. You Have Long-Term Plans for the Savings

Because CDs have set terms, they're often better for people who are saving for something specific and won't need to touch the savings until the term ends. For example, if you plan on buying a new car in three years, you can use a CD to lock away money for a downpayment and let it earn interest until the term is over and you're ready to use your savings.

2. You Want the Money to Be Off Limits

Saving money can be challenging, especially when your savings and checking accounts are connected. With a CD, you can implement stronger financial discipline for yourself.

With the funds locked into the account, you make them off-limits to yourself, so you can't spend that money. Plus, the penalties associated with early withdrawal serve as more incentive to let your money sit in the CD.

3. You Want a Low-Risk Investment at a Locked Rate

A CD gives you a locked interest rate, typically higher than those of money markets and other savings accounts. Because your rate is locked, there's less risk associated with this investment type — you know you're earning the same amount of interest for the duration of your term.

When to Open a Money Market Account

Here are two situations where opening a money market account may be better for you.

1. You Need Access to Your Savings

Despite having monthly withdrawal limits, money market accounts allow you to access your savings as needed. This flexibility is ideal for saving for emergency funds or other situations where you don't want to be penalized for accessing your money. For example, you can use money market accounts to save for a rainy day — whether it be car troubles or home repairs — and access the funds immediately rather than waiting for a term to end.

2. You Want Short-Term Boosts to Your Savings

Money market accounts pay higher interest rates than standard savings accounts, so they're a great option if you're looking for short-term boosts to your funds. For example, if you're trying to save as much money as possible before your next vacation, putting your funds in a money market account can help you achieve a short-term savings goal. Plus, the flexibility allows you to take out that money when your vacation comes around.

Open an Account With First Commonwealth Bank

Whether you think a CD or money market account is best for you, or you need help deciding, First Commonwealth Bank makes saving money convenient for you. Our money market accounts offer high interest rates and easy access to your money, while our CDs give you the flexibility to choose your term and are protected by FDIC insurance.

Our team is here to help you reach your financial goals. Open a money market account or a CD with us online today or contact us for more help.