Understanding Savings Accounts, Money Market Accounts and CDs

Summary

• Savings accounts can help you set money aside for emergencies, planned purchases and other financial goals.
• Regular savings accounts generally offer easy access to your money while allowing you to earn interest.
• Money market accounts may offer higher or tiered interest rates, but they can also have higher balance requirements.
• Certificates of deposit (CDs) are designed for money you can leave untouched for a set term and may charge a penalty for early withdrawal.
• Comparing access, balance requirements, fees, interest and APY can help you choose an account that fits your goal.

Saving can be easier when the account you choose matches what you are saving for. A regular savings account may make sense when you want ready access to your money. A money market account may offer a different balance of access and earning potential. A certificate of deposit can be useful when you know you will not need the money until a specific time.

Understanding how these accounts work can help you decide where to keep money for an emergency fund, a major purchase or another financial goal.

How Savings Accounts Earn Interest

When you keep money in an interest-bearing savings account, the financial institution pays interest based on your balance and the account's terms. Interest rates can vary by account type and financial institution.

One useful number to compare is the annual percentage yield, or APY. APY reflects the amount you can earn over a year, including the effect of compounding.

With simple interest, earnings are calculated on the principal amount. With compound interest, earned interest is added to the balance, creating a larger base for future interest calculations. Depending on the account, interest may compound on a daily, monthly, quarterly or other schedule.

Regular Savings Accounts

A regular savings account is designed to help you keep money separate from everyday spending while maintaining access when you need it. Account activity, including deposits, withdrawals, fees and interest earnings, is typically reflected on your account statement.

Savings account terms vary. Some accounts may require a minimum balance to earn interest or avoid a fee, while others may have different requirements. Before opening an account, review the minimum opening deposit, balance requirements, fees, interest rate, APY and options for accessing your money.

A regular savings account may be a practical choice when accessibility matters more than earning the highest available rate.

Money Market Accounts

A money market deposit account combines features commonly associated with savings and checking accounts. Depending on the financial institution and account, it may offer check-writing or transfer capabilities along with interest on the balance.

Money market accounts may pay higher or tiered interest rates compared with some regular savings accounts. A tiered rate means the rate can change based on the amount of money in the account.

The tradeoff is that money market accounts may require a higher opening deposit or balance. Falling below an account's required balance may also result in fees or affect earnings, depending on its terms.

When comparing a money market account with a regular savings account, consider how much you plan to keep in the account, how often you expect to access the money and the account's current terms.

Certificates of Deposit

A certificate of deposit, or CD, is a time deposit. When you open one, you agree to keep your money deposited for a defined term. In exchange, CDs may offer a higher interest rate than some other deposit accounts.

CD terms can range from months to years. The account may also require a minimum deposit. Because CDs are intended for money you can leave deposited until maturity, withdrawing funds early may result in an early withdrawal penalty under the account's terms.

When a CD reaches maturity, you may be able to move the money to another account, renew or roll it into another CD, or receive the funds another way offered by the financial institution. Review the maturity and renewal terms carefully so you know what happens if you do not provide instructions before the applicable deadline.

Match the Account to Your Timeline

The right savings option depends in part on when you expect to need the money.

A regular savings account can help when you want to keep funds available for an emergency or near-term goal. A money market account may be worth considering when you can maintain its balance requirements and want a combination of access and interest. A CD may fit a goal with a known future date if you can leave the money deposited for the full term.

For expenses that occur on a predictable schedule, a CD term that matures near the time you need the money may help you keep those funds set aside while earning interest.

What to Compare Before You Choose

Before opening a savings account, money market account or CD, compare the features that matter for your goal:

• Interest rate and APY
• How and when interest compounds and is credited
• Minimum opening deposit
• Minimum balance requirements
• Monthly or other account fees
• How easily you can access the money
• CD term and early withdrawal provisions, when applicable
• What happens when a CD matures

Choosing an account is less about finding one option that works for everyone and more about matching the account's features to your savings goal, timeline and need for access.