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Checking Account, Savings Account, CD or Money Market Account?

checking saving money market CD account

When it comes to where to put your money, you have many options. But it’s sometimes hard to know if the right banking option is a checking account, savings account, CD or money market account.

All four choices can have federal insurance, generally up to to $250,000 per depositor, so your money’s protected, no matter which option you choose. It’s also possible to have all four types, or any combination. But each has different advantages:

  • Checking accounts are good for people who need unrestricted access to their money and aren’t trying to maximize the amount of interest they earn. The best checking accounts often have low or no monthly fees.
  • Savings accounts are better for keeping a cash cushion that you don’t need for daily expenses but could access quickly in an emergency.
  • Money market accounts are good for people who have more cash to deposit, want to earn more interest than with basic savings accounts and want to make withdrawals using checks and debit cards.
  • Certificates of deposit, or CDs, work better for people who want to earn higher guaranteed interest rates, and are willing to give up access to their money for a certain time period.

Here’s a look at each account in detail:

Checking accounts

When you want easy access to your money,  bank checking accounts are ideal. You can make transactions in different ways, including online transfers, ATMs, debit card purchases and by writing personal checks.

If you’ve had checking accounts, you probably know that they tend to pay the lowest interest rates, hovering around 0% at most big banks these days.  Interest checking accounts carry better-than-zero rates. But if you have cash that you don’t need to spend right away, you could probably get a bigger yield by depositing at least some of that money in one of the other types of accounts.

Savings accounts

The interest rates on savings accounts are usually better than the rates for checking.  You can get quick access your money, too, but savings accounts aren’t convenient for everyday purchases.  In fact, there’s a federal regulation that says you can only make up to six “convenience” transfers or withdrawals a month.

Convenience transactions include online or phone transfers and withdrawals.  However, the  monthly limit of six doesn’t apply to “non-convenient” withdrawals, such as those made at a bank branch, ATM or by mail.

Money market accounts

These deposit products are similar to savings accounts, but tend to pay more interest. To get the best money market rates, you usually have to meet higher deposit requirements of $1,000 or more, so the accounts are better for people who have more cash to save.

Another difference between money market and savings accounts is financial institutions often issue checks and debit cards for money market products, something you don’t usually see with savings accounts.  Having checks and debit cards can make it easier to access your money, but you’d still have the six times a month convenience withdrawal limit, so don’t expect to use money market accounts for everyday purchases.

You also don’t want to confuse money market accounts with money market mutual funds. With the latter, your cash could be invested in different types of securities, and the money is not FDIC-insured.

Certificates of deposit, or CDs

If you’re OK with more limited access to your cash in exchange for a higher interest rate — meaning you won’t need to touch your money for six months or more — a CD could be a good option. This type of account tends to pay more interest than savings and money market accounts.

Terms typically last anywhere from a few months to five years or more, and you can usually get the best CD rates with the longer terms. The minimum amount of money to open an account is often around $1,000.

CDs usually have early withdrawal penalties that could erase any increase in interest earned, so you wouldn’t want this type of account if you think you’d need to withdraw your money before the end of the term.

CD laddering

If you’re not sure whether you’ll need your money before a longer-term CD matures, you could choose to build a CD ladder. With this strategy, you’ll put part of your money — say, one-third of the total — into a one-year CD, then “ladder” another third of your money by putting it in a two-year CD, and then put the rest in a three-year CD.

When your first CD matures after a year, you could open another three-year CD, like another rung on a ladder, and repeat the process annually. Instead of tying up all your money in a three-year CD, you’ll know you could access a portion of it annually. You could also use this strategy for other time periods, such as five years instead of three.

Weigh your options

When you consider different banking choices, you’re often looking at a trade-off between accounts that have a lot of flexibility but pay low interest, or accounts that pay more interest but have more withdrawal restrictions.  By understanding the different types of accounts and knowing your goals for your money, you can determine how to make the best use of all of your banking options.

Margarette Burnette is a staff writer at NerdWallet, a personal finance website. Email: mburnette@nerdwallet.com. Twitter: @margarette. John Gower of NerdWallet contributed to this article.

Updated Aug. 28, 2015.


Image via iStock.

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  • padden

    You’re better off investing in bitcoins ! CD’s offer single digit returns. Bitcoin has yielded triple digit returns.

  • http://www.facebook.com/thermbeffect rmbeffect

    index funds or ETFs may be a better solution

  • Robert Perlberg

    I have a savings account at a certain bank but no checking account. The bank called and told me I would get a higher rate on my savings account if I opened a checking account, even if I didn’t use it. Why is this? I’m skeptical as to whether I should do this. If the bank is so hot for me to do this, I figure there must be some “scam” aspect to it that I should be wary of.

    • NWjohn

      Banks often use incentives like higher interest rates to get customers to cross-sell new accounts and services (like a checking account, in your case). Theoretically, the more accounts you have with a bank, the more profitable you are as a customer and the harder it is for you to switch.

      If you choose to open the checking account to earn the higher rate of interest, keep in mind that you could be on the line for monthly fees or other charges, even if you don’t use the checking account at all.

      • Robert Perlberg

        Thank you.

  • Rebekka L. Mckeny-Kreft

    I have sevarl EE series bonds. totaling apx. $600. they are not matured yet. im looking for a quicker return with more money. should I cash them and put them in rolling CD’S? i checked the return of 500 in a 5 year cd its only $143. will rolling them create a better return? im so confused.