The Role of CDs and Money Market Accounts in a Diversified Savings Strategy

The chances are good that you've got some experience with savings accounts -- and you might even have one of your own. The rates for online high-yield savings accounts are particularly noteworthy, and some of us have taken notice. According to savings account research from The Ascent, 31% of Americans have a savings account paying at least 4% APY.

The reason for higher APYs (annual percentage yields) is that we're currently in a high-interest-rate environment. This is due to the Federal Reserve's response to soaring inflation in 2021 and 2022 -- it raised the federal funds rate 11 times in an attempt to bring inflation back down to earth.

These efforts seem to have succeeded, as the most recent report from the Consumer Price Index noted that we were facing an inflation rate of 3.1% year over year -- quite the drop from the record 9.1% in June 2022.

A lot of experts are predicting a drop in the federal funds rate this year, and when it happens, banks will likely reduce rates on deposit accounts, too. So now is a good time to consider CDs and MMAs, alongside savings accounts -- especially if you want to diversify your savings. Let's take a closer look at both.

Lock in rates with CDs

As of this writing, you can find shorter-term (a year or less) certificates of deposit (CDs) with APYs over 5%. This is comparable to the best savings account rates available, but unlike a savings account, a CD comes with the chance to actually lock that rate in for the duration of the CD's term. Your savings account's rate can go up or down at any time -- I've been watching mine tick up since 2022, which is always a cause for celebration. A higher APY means a higher return on my saved cash.

But if rates do indeed fall this year, I expect my savings APY to follow suit. If you open a 1-year CD today at a rate of 5%, you will get to keep that rate for the entire year, regardless of what rates at large do. This can be a boon if you have a chunk of money with a defined purpose and a set timeline not too far in the future (perhaps cash you've saved for a wedding or a home purchase in 2025). Just note that you could pay a hefty penalty if you have to break your CD term early.

Enjoy easier access with an MMA

Money market accounts (MMAs) are also seeing positive rate effects from that higher federal funds rate. Some of our favorite MMAs have rates over 5% too, and you might be wondering why you'd need one, especially if you already have a savings account and perhaps a CD or two. MMAs offer a perk that neither of these accounts have -- easier access.

While you may still be limited in the number of withdrawals you can make from a money market account every month (thanks to old rules under Regulation D that some banks still enforce), you can often make them much more easily than you could with a savings account. A lot of savings accounts don't come with an ATM or debit card, and you must access the money in them via a linked checking account.

But MMAs do often come with debit cards or even checks, eliminating a step if you need to take money out. This is why an MMA might even be a great place for your emergency fund -- if you've got a surprise bill to pay and no time to wait, you can access your cash directly.

Having the ability to lock in a high APY or directly access your money with ease are great benefits. If they sound appealing to you, consider using CDs and MMAs to diversify your saved cash, especially while rates are still this high.