Opening an account that earns an annual percentage yield (APY) allows your cash to grow passively and helps your funds keep pace with inflation.
Whether you’re saving for retirement, emergencies, or a vacation, an interest-bearing account is a low-risk way to grow your savings. But what options do you have, and which one is the best?
Savings, CDs, or money market accounts: Does it matter?
The good news is that there are multiple interest-bearing accounts to choose from — but sometimes, too many options can cause decision paralysis.
Three of the most popular interest-bearing accounts are savings accounts, certificates of deposit (CDs), and money market accounts. All three are deposit accounts with FDIC or NCUA insurance, but they’re all very different.
We break down the good and the bad of each to help you choose the right option for you. And keep in mind that you’re not limited to just one savings option — you can always go for all three if you’re feeling ambitious.
Savings account
The Good
Savings accounts are designed for exactly what they’re named after. The average rate on a savings account is 0.46%, according to the FDIC.
Savings accounts are low-maintenance accounts, often without balance requirements, and it’s easy to find no-fee options. They also allow for deposits and withdrawals and can often be linked to your checking account for overdraft protection and simple ACH transfers for easy contributions. Additionally, linking your checking and savings accounts lets you withdraw from your savings via your checking debit card at an ATM.
For the best-of-the-best rates, look to high-yield savings accounts, which are just regular savings accounts with significantly higher rates — sometimes reaching up to 5% APY. Higher rates are also more common with online banks, which have fewer overhead costs since they don’t need to maintain physical branches.
The Bad
Savings accounts don’t come with a debit card, as they’re intended for saving rather than spending. If you want some cash accessibility, research savings accounts that offer ATM cards.
Also, most savings accounts typically limit withdrawals to six times per month.
Certificates of deposit
The Good
On average, CDs offer higher interest rates than savings accounts. CDs have fixed terms, usually ranging from one month to 10 years, during which your funds are placed in an account and earn interest. At the end of the term, you can withdraw your deposit and earnings or renew for another CD. They’re considered a safe and consistent way to earn interest on your funds without the hassle of monthly maintenance fees.
With a fixed-rate CD, you’re guaranteed to earn the rate set at the time of opening throughout the CD’s term. In contrast, savings accounts have a variable APY, meaning it could increase or decrease at any time.
The average rate on a savings account is just 0.46%, while CD rate averages can more than double that rate. A 3-month CD has an average rate of 1.54%, a 6-month CD sits at 1.75%, and 12-month CDs are even higher, with an average rate of 1.81%, according to the FDIC.
And those are just the average rates; high-APY CDs are widely available, and you can easily find one with rates around 4% to 5%.
The Bad
Due to the structure of CDs, expect a high opening deposit requirement, often starting at $1,000. Additionally, CDs aren’t linked to a debit or ATM card, so you can’t spend the funds while they’re in the account.
The biggest downside, depending on your perspective, is that CDs are “locked” accounts. If you need to withdraw the CD’s funds before the term ends, you’ll incur early withdrawal penalties, which are often a portion of your earned interest. A full withdrawal closes the account. However, no-penalty CDs may allow for full or partial withdrawals before the term ends without any penalties, but they tend to have lower rates.
Money market accounts
The Good
Money market accounts (MMAs) are a sort of combination account that merges the utility of checking and the interest earnings of savings.
The main benefit of MMAs is that most come with a debit card, a checkbook or sometimes both. They offer much more flexibility than traditional savings accounts, giving you the option to spend your hard-earned money while earning interest on your balance.
The average rate for MMAs is 0.61%, as reported by the FDIC — slightly higher than savings accounts’ average rate of 0.46% but still lower than many CD rates.
The Bad
MMAs typically have balance requirements to earn APYs and may also require a large opening deposit. The average deposit requirement is around $1,000, though we’ve seen deposit requirements well over $2,000. You may also have to deal with monthly maintenance fees, which aren’t as common with savings accounts, and CDs don’t have monthly fees at all.
Bottom line
The biggest factor in your decision between savings, CD or MMAs is which offers the best rate and fits your situation best. If you struggle to save because you constantly withdraw from your savings for frivolous spending, a CD can lock down your funds and dissuade you from spending. But if you want the ability to withdraw cash on the fly, an MMA or savings account might make the most sense.
At the end of the day, each option has its pros and cons, but nothing prevents you from having two or three interest-bearing accounts to cover your bases and maximize your earnings.
Just keep in mind that savings rates are dropping — slowly but still dropping. If you want to lock in a high APY, a CD might be the way to go.
