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In today’s evolving economic landscape, when inflation is rising again, high interest rates remain on pause and the costs of everyday expenses are elevated, maintaining access to the money you have painstakingly saved remains a top priority. And, put simply, a certificate of deposit (CD) account doesn’t offer that flexibility. They do, however, come with high interest rates now, but those rates will need to be earned by keeping your funds untouched in the account until it matures. Take out the money prematurely, and you’ll get hit with an early withdrawal penalty. That scenario becomes more likely with a long-term CD, which comes with terms ranging from 18 months to multiple years.
A money market account, on the other hand, comes with similarly high rates and the flexibility that a CD account does not. Some money market accounts will even offer check-writing features for account holders. So, on the surface, it seems that a money market account would be the logical place to store your money now, particularly when looking for a home for a large, five-figure amount like $20,000. Before getting started, however, it’s critical to consider the interest-earning potential each account type offers. Between a $20,000 long-term CD and a $20,000 money market account, which would earn more interest right now? Below, we’ll do the math.
See how much more money you could be earning with a high-rate CD account here.
$20,000 long-term CD vs. $20,000 money market account: Which earns more interest now?
CD interest rates, as noted above, are fixed and will remain the same for the CD account’s full term, even if the rate climate changes during that period. Money market account rates, on the other hand, are variable and expected to change over time, particularly over a multiple-year period.
In other words, calculating the interest earnings of a CD is simple to do with precision, but impossible to do with a changing money market account rate. Here, then, is what a $20,000 deposit into both account types can earn now tied to current rates, assuming no early withdrawal penalties are applied to the CD and that the money market account rate remains constant:
- $20,000 18-month CD at 4.16%: $1,260.89
- $20,000 money market account at 4.32% after 18 months: $1,309.90
- Difference between the two accounts: The money market account earns $49.01 more
- $20,000 2-year CD at 4.10%: $1,673.62
- $20,000 money market account at 4.32% after 2 years: $1,765.32
- Difference between the two accounts: The money market account earns $91.70 more
- $20,000 3-year CD at 4.15%: $2,594.76
- $20,000 money market account at 4.32% after 3 years: $2,705.59
- Difference between the two accounts: The money market account earns $110.83 more
- $20,000 5-year CD at 4.20%: $4,567.93
- $20,000 money market account at 4.32% after 5 years: $4,709.72
- Difference between the two accounts: The money market account earns $141.79 more
In each of these four instances, the money market account earns more interest. And the difference becomes starker over time, with the 5-year option earning more than $140 compared to the CD account. But this is all calculated on the assumption that today’s rates will be the same in July 2030, which they almost assuredly will not. The rate climate has changed dramatically since July 2020 and could change in unexpected ways in the years to come.
Savers, then, will need to answer one primary question: Does the lower but guaranteed interest they can earn with a $20,000 long-term CD outweigh the potentially bigger returns they can get with a money market account? For many, the long-term CD will be the safer (and more lucrative) option.
Compare your current long-term CD rate offers here to learn more.
The bottom line
A $20,000 money market account will earn more than a $20,000 long-term CD on the assumption that the former account’s interest rates remain the same for years to come, which is highly unlikely. Savers should carefully consider both options before getting started. It likely took a long time to build up $20,000 in your savings, so take a bit more time to do your research and calculate your interest-earning possibilities to better determine where to move it next.
