Forget CDs: Here's One Savings Account You're Not Paying Enough Attention To

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There's a lot of hype about opening certificates of deposit (CDs) right now, especially since the Federal Reserve might (maybe, finally, soon?) be cutting interest rates. But CDs have a few big problems and risks. CDs are not the best place for most Americans to keep their cash.

And all the hype about CDs, all the misguided chatter that assumes CDs are the best place to keep your savings, is overlooking another type of savings account that deserves more attention: money market accounts .

The best money market accounts pay APYs that are the same as (or better than) the best CDs. Because of how the cash in a money market account gets invested (in short-term, low-risk securities like government bonds), money market accounts can sometimes pay higher APYs than the best savings accounts . And with money market accounts, you get flexible access to your cash without the biggest risk of CDs.

Let's look at a few reasons why money market accounts should be on your radar instead of CDs.

Why you should forget about opening a CD

Opening a CD can be a smart move for some people. If you have plenty of cash in the bank and you want to lock in a good rate for a fixed length of time, CDs can be a good choice for your savings. Some retirees with big cash nest eggs, or high-net-worth families, should use CDs to generate steady, safe fixed income.

But most Americans aren't like this. Most Americans are vulnerable to one big risk of CDs: early withdrawal penalties. That's because most Americans don't have a lot of savings -- the typical American has only $8,000 in the bank, total. And only 45% of Americans can afford to cover a $400 emergency expense with cash from their checking account or savings account.

If you don't have much cash, don't open a CD. CDs require you to leave your cash alone for a set period of time, and if your plans change and you need to take the cash out sooner, tough luck -- you have to pay an early withdrawal penalty. This penalty can devour most (or all) of the interest you earned on the CD.

People work hard, people don't have enough savings, and people deserve to earn yield on every dollar they have in the bank. Most Americans aren't financially stable enough to take the risk of opening a CD.

Yes, you can get a fixed yield with a CD, and your APY won't go down during the CD's term, even if the Fed cuts interest rates. But early withdrawal penalties are a big downside to CDs that most middle-class Americans can't afford.

Most people reading this are not affluent retirees or wealthy investors. You are likely going to be better off with a money market account instead of a CD.

Money market accounts vs. CDs

Why are money market accounts better than CDs?

Money market accounts are flexible

A money market account works mostly like a savings account: You can withdraw your cash at any time without early withdrawal penalties. Some money market accounts even offer debit cards and check-writing capabilities, in case you want to pay some bills directly from your savings. (But don't use this account to replace your regular everyday checking account ; most money market accounts have limits on the number of withdrawals you can make per month.)

Money market accounts pay high yields

CDs aren't the only game in town for high yields. You can also earn high APYs on your savings with money market accounts. The best money market accounts (as of July 27, 2024) are paying up to 5.30% APY. That means every $1,000 of savings would earn $53 of yield in one year. And that 5.30% APY is better than what most of the best 1-year CDs offer.

Money market accounts let you keep every dollar you earn

Did we mention no early withdrawal penalties? Sorry to keep hammering on this point, but I'm passionate about this topic: People who struggle to save money deserve a better deal from banks. I don't want to see anyone get hit by unfair early withdrawal penalties from a CD, not even one dollar, when they could've kept their cash in a more flexible money market account.

Bottom line

If you want an easy, flexible way to earn yield on your savings, and you don't have tens of thousands of dollars of spare cash, opening a money market account is likely a better choice than a CD.

Yes, money market account APYs are not fixed like CDs rates; if the Fed cuts interest rates soon, money market APYs will likely go down, too. But money market accounts don't have the risks of CDs -- which can potentially take away some of the yield that you deserve to get. Ignore the hype about CDs. Consider a money market account instead.

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