Money Market Account vs. Share Certificate — Which One is Better?
Both money market accounts and share certificates are popular ways to grow savings safely and reliably but are, in reality, very different products. We consider the advantages and potential disadvantages of investing money in a share certificate vs. a money market account.
GET THE BEST BANG FOR YOUR SAVINGS BUCK
If you’re looking to expand your money horizons beyond your regular savings account then both money market accounts and share certificates are obvious next steps. Each offers higher savings rates but with many of the protections and guarantees your money already enjoys in your checking and traditional saving deposits account.
Here we take a look at each of these popular but very different savings alternatives. We consider how each one works and their respective advantages and disadvantages for different types of savers. And, while both have their places in a well-rounded financial portfolio, we look at cases when either a money market account or a share certificate might make sense for you.
WHAT IS A MONEY MARKET ACCOUNT?
Money market accounts were created to allow credit unions and banks to offer their members and customers interest rates closer to those available on the open market without the risks associated with these investments.
HOW DOES IT WORK?
Money market accounts offer higher earnings on your money with many of the benefits of a regular deposit account, including check writing and ATM withdrawals using a debit card. To do this, they generally require a higher opening balance and a minimum balance above which interest is paid on deposits.
Like many savings accounts, money market accounts also restrict the number of monthly transactions, typically limiting withdrawals to six transactions a month.
Deposits in money market accounts are also insured by the federal government in the same way as those in traditional checking and savings accounts. At credit unions, this means up to $250,000 per account is guaranteed by the National Credit Union Administration (NCUA).
WHAT IS A SHARE CERTIFICATE?
Share certificates are term investments, meaning you usually invest a fixed sum of money for a fixed period of time at a fixed interest rate. When your certificate matures, you are repaid your principal plus the value of your accumulated dividends.
HOW DOES IT WORK?
Like money market accounts, share certificates offer higher interest rates than a conventional savings account, but in a more structured package. Your money is invested in a share certificate for a period from three months up to five years. During this time your money earns regular dividends at a fixed rate that are usually reinvested along with your principal.
While you cannot access your money during this time without incurring heavy penalties, when your certificate does mature, you are paid out the full amount as a single lump sum.
As a result, when you invest in a share certificate, you’ll know up front exactly how much you’ll earn and when you’ll get your money back. Because your principal has been untouched and interest has compounded over this time, your money can grow more quickly than in a regular deposit account. Share certificates can usually be opened with a minimum deposit of $500.
At the same time, share certificates are also fully insured up to $250,000 per account just as regular deposit accounts are. This means that money invested in a share certificate earns guaranteed interest while being fully insured against loss of principal. And that makes share certificates among the safest and most predictable investments you can make.
MONEY MARKET VS. SHARE CERTIFICATE
Money market accounts and share certificates are both widely available and easy to open at almost any credit union or bank. They also offer interest rates over a broadly similar range and are widely used to manage and grow money over periods from a few months to a few years.
That said, it’s essential to understand that these are very different products which can make direct comparisons of their features and benefits difficult. The most important distinction is that share certificates are term deposits that are paid into and paid out only once, while money market accounts are current accounts where deposits are held indefinitely.
The following table summarizes some other important differences:
| Money Market Account | Share Certificate | |
|---|---|---|
| Account Type | Savings Account | Term Deposit |
| Interest Rates | Variable | Fixed |
| Minimum Deposit | Varies | Usually $500 |
| Minimum to Earn Interest | Varies | None |
| Access to Funds | Monthly transaction limits | None until maturity |
| Term | Indefinite (monthly dividends) | 3-60 months (monthly dividends) |
| Fees | Possible maintenance fees | Generally no fees |
PROS (AND CONS) OF MONEY MARKET ACCOUNTS
The safety and convenience of money market accounts and the liquidity (meaning the ease of access to your money they offer, subject to transaction limits)—make them popular choices for storing money you’d like to save but might still need to get your hands on.
Some of the other major pros of money market accounts include:
Higher interest rates than traditional savings accounts
Instant access (subject to transaction limits)
Associated checking services and ATM debit card withdrawals
Relatively low minimum balances
Variable interest rates mean dividends could fall
Deposits insured up to $250,000
At the same time, money market accounts have some potential drawbacks compared with other banking products. These include:
Lower returns than some unsecured investments
Transactions, including withdrawals, are generally limited to six a month
Some accounts have monthly fees
Relatively low-interest rates might not keep up with inflation
PROS (AND CONS) OF SHARE CERTIFICATES
The predictable, guaranteed returns of share certificates make them a popular choice for anyone with spare money on hand. Some of the other major pros of share certificates include:
Higher interest rates than traditional savings accounts
Choice of terms from 3-60 months
Low opening deposit
Options to cash out or reinvest dividends
Fixed interest rates will overperform if market rates fall
Deposits insured up to $250,000
That said, share certificates also have some potential disadvantages compared with other investment options. These include:
Lower returns than unsecured investments
Your money is inaccessible until the end of your certificate term
Relatively low-interest rates might not keep up with inflation
Fixed interest rates might underperform if market rates rise
BUT WHICH IS BETTER FOR YOU?
Money market accounts and share certificates are very different but ideally complementary approaches to managing and growing your savings. Money market accounts allow you to put money aside so it can earn interest, while still being able to access it if you need it. Share certificates let you build significant earnings over time, especially if you reinvest your gains.
Both have their place in any well-rounded investment portfolio, but there are some situations where one clearly makes more sense than the other.
JUST STARTING OUT
If you’re just beginning to budget your money and trying to save, a money market account is a great place to stash extra cash. Your money can begin to earn interest but it's there for you if you need it. It’s a good place to start to build a nest egg or create an emergency fund to help with an unforeseen expense or unexpected loss of income.
A share certificate, on the other hand, makes no sense at this stage of your savings journey because you will only be able to contribute amounts incrementally and if you need to get access to money in a hurry, you won’t be able to do so without incurring a big penalty.
SAVING FOR A GOAL
If you’re ready to commit to a savings goal then you have a choice to make. Both money market accounts and share certificates can be set up for a specific purpose, but which you choose depends on several factors:
Do you have an amount already saved?
Do you have a specific date or timeline in mind?
Do you want to be able to make automatic deposits?
Do you have trouble sticking to savings goals?
Are you certain you can do without the money for a time?
If you have an amount (typically more than $500) saved and you have a specific end date when you will need the money, then it’s hard to argue with the predictability and guaranteed returns of a share certificate, especially if you want to remove the temptation to dip into the money early.
If you are not certain you can spare the money you have saved, then you should not consider a share certificate.
On the other hand, if you want the option to set up an automatic deposit from your salary or checking account, then you will likely need to go with a money market account.
Whichever route you choose, both money market accounts and share certificates are great ways to save for major purchases and important events.
BUILDING A NEST EGG
If you are looking to turn your monthly savings into long-term wealth you can use to help pay for a car, a home, a retirement fund, or a college education, then you are looking at committing money for periods of at least several months to several years.
In this situation, share certificates offer significant advantages. Not only will you keep your money safely separate from your daily and monthly budgeting and short-term savings, but by repeatedly investing some or all of your earnings back into longer-term share certificates, you will start to gain real rewards from compounding interest over time.
At the same time, you’ll benefit from knowing exactly how much money you’ll receive as each certificate matures. You can even invest in a variety of certificates so you’ll have money regularly coming available to access or reinvest. Best of all you’ll be building significant savings with almost no risk to your investment at all.
GHS FCU: YOUR SHARE CERTIFICATE PARTNER
AT GHS Federal Credit Union we know how important structured savings is to building long-term wealth. Our share certificates are designed to offer our members a safe, predictable, and high-earning way to turn their savings into a valuable asset for the future.
GHS FCU share certificates offer competitive rates, flexible terms, and fixed dividends with funding secured up to $250,000 by the NCUA. Best of all, you’ll know ahead of time the dividends you’ll receive upon the certificate’s maturity date. Plus, you can set up any GHS FCU share certificate to automatically renew so you can keep earning on a regular basis.
Contact us today to open a GHS FCU share certificate, or click below to learn more.