Similarities of money market accounts, savings accounts, and CDs

They may look different, operate somewhat differently - and have a variety of diverse terms and conditions - but regular savings accounts, money market accounts (MMAs) and Certificates of Deposit (CDs) are all forms of savings accounts.

They are not to be confused with transaction accounts, like checking accounts, which exist to provide you with immediate and unlimited access to your funds whenever and wherever you need them.

These accounts can often be set up as online savings accounts although your ability to make frequent transactions will be limited with MMAs and CDs. A typical savings account often does not have a maximum number of monthly transactions, but it will normally become an annoyance if you attempt to use it as a transaction account.

The menu of interest rates offered on MMAs, CDs, and savings accounts may differ widely from institution to institution, but the logic will be similar from all account types.

Differences among MMAs, savings accounts, and CDs

While these are accounts are all savings accounts, they operate quite differently. The rule of thumb: The more flexibility to add to or withdraw from an account will affect the interest rate offered. More flexibility = lower interest rate. Less flexibility = higher interest rate.

All financial institutions operate in an environment of money management, heavily dependent on the amount and stability of deposited funds. Remember, from the day you make your deposit of any amount, the institution promises to pay you some percentage of interest.

It is imperative that the institution immediately "do something" with that money to earn interest (how else could they pay you ?) for income purposes. They must either loan it out or invest it somewhere, while always earning more than they've agreed to pay you.

See also: Savings goals calculator

The more opportunity to increase or decrease your account you're given, the less stable is the balance in your account. Wide fluctuations impair the institution's ability to properly manage their deposits. Therefore, the interest rates offered to you will vary based on the amount and stability of different savings accounts. Here are some common examples:

Savings account

• Unlimited access to funds – You can typically add to or withdraw from normal savings accounts at will.
  
  
• Interest paid monthly, quarterly, semi-annually, or annually – Interest is paid according to the specific account terms. You may have a choice of savings accounts that pay different rates and wherein interest is posted more or less frequently.
  
  
• Link to checking or other transaction account – Many savings accounts can be linked to your checking account to provide low or no cost overdraft protection.
  
  
• May be set up as online savings account to allow fast transfers between all accounts you have.

Money market account

• Access to your funds is limited – You are typically allowed three to six transactions per month to add to or withdraw from your account.
  
  
• Limited withdrawal by check – You will normally be permitted to write up to three checks per month. This restriction gives you some access to your funds while maintaining account balance stability.
  
  
• May be linked to your checking account – Some banks and credit unions allow you to link your MMA to your checking account to provide overdraft protection, saving you NSF fees and eliminating the cost of an unsecured loan to fund overdrafts.

Certificate of deposit

• Time deposit, not an open-ended account – A CD is an agreement, or contract between you and your institution. You agree to deposit a fixed amount of money for a fixed amount of time. Your bank or credit union agrees to pay you a fixed amount of interest during the term of your certificate.
  
  
• Limited or no access to your funds during the term – You should be prepared to leave these funds on deposit, without transactions, for the entire term of the agreement. Emergency withdrawals will come with a substantial penalty cost.

Which one is best?

All three of these savings account choices have their own pros and cons. There is no universal better or worse choice - it depends on each specific situation.

If you have funds, for which no need is associated, a CD will earn you the highest interest. Should you think you might need some access to funds, an MMA will provide that option. However, if you believe you'll need to deposit and withdraw frequently during an average month, stick to a regular savings account.

See also: Compare Savings Accounts