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 $250,000 per depositor, so your money is protected no matter which option you choose. It’s also possible to have all four types or any combination. Each has its 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 an interest-earning 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 be able to make a few 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 set period.
Here’s a look at each account in more detail:
When you want easy access to your money, bank checking accounts are ideal. You can make transactions in different ways, including through online transfers, ATMs, debit card purchases and 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 a different type of account.
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 make only 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, an 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, a CD could be a good option. CDs tend to pay more interest than savings and money market accounts.
Common deposit terms range from three months to five years, but you can find CDs available for all sorts of time frames. Generally, the longer the term, the better the CD rates will be. The minimum amount of money to buy a CD is often around $1,000.
CDs usually have early-withdrawal penalties that could erase any increase in interest earned, so you wouldn’t want to open a CD if you thought you’d need to access your money before the end of the term.
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.
This article was updated April 15, 2016. It was originally published in June 2014.