Money Market Accounts and Deposit Certificates

A money market account (MMA) and a deposit certificate are two types of financial instruments that can help you manage your money and get the most out of your investments. Both of these financial products share similarities, such as low-risk investments and modest interest rates, but they have different characteristics that make them suitable for different individuals and different financial goals. Before making a decision, it’s important to understand both products and their pros and cons.

What is a Money Market Account?

A money market account is a type of savings account offered by financial institutions such as banks and credit unions. This type of account offers higher interest rates than a traditional savings account, although the rates are still relatively low. Money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per individual, making them a safe and secure option. Money market accounts offer higher interest rates due to their reduced liquidity and higher transaction costs associated with them.

Money market accounts come with several restrictions. For example, a minimum initial deposit and a minimum balance usually must be maintained in order to receive the higher interest rate. Withdrawals from your MMA are limited to certain transactions and you may be charged a fee if you exceed the maximum number.

What is a Deposit Certificate?

A deposit certificate (CD) is a type of bank account that allows customers to deposit money and earn interest over a fixed or variable period of time. A CD earns interest at a higher rate than a savings or money market account, but its main advantage is that the interest rate is fixed for the length of the term of the CD. This means that your principal value and interest rate won’t fluctuate as it might with a variable rate account.

CDs usually require a minimum deposit and come with tax advantages (although this should be discussed with a tax professional). CDs also come with relatively low risk and you can get your principal back in its entirety when the term of the CD is over. However, you may incur a penalty for early withdrawals. CDs are not insured by the FDIC, but they are backed by the bank that issued them.

What are the Advantages and Disadvantages of Money Market Accounts and Deposit Certificates?

Before deciding on which type of account to open, it is important to consider both the advantages and disadvantages of each one. Money market accounts offer a competitive interest rate, a minimum opening deposit, and potential tax advantages. Depending on the bank, you may also have access to a wide range of services such as check writing, ATM access, and online banking. However, money market accounts generally come with lower interest rates in comparison to deposit certificates, and the minimum balance requirement can be a hindrance for some savers. Additionally, money market accounts are subject to Federal Reserve Regulation D, which means that there are restrictions on how often you can make withdrawals from your account.

Deposit certificates provide higher interest rates than other saving or investment accounts, as well as a fixed rate of return over the duration of the term. You are also able to withdraw your principal in its entirety when the term is over. In addition, deposit certificates are relatively low risk investments. However, they require a larger initial deposit and they come with a penalty if you make an early withdrawal.

Conclusion

Both money market accounts and deposit certificates can be useful financial products depending on an individual's financial goals. Money market accounts allow individuals to save their money safely and access it relatively easily, while deposit certificates provide a higher interest rate and greater security for your deposit. Before making a decision, it’s important to carefully evaluate the pros and cons of each account and to consider which one will be the best fit for your specific situation.

Sources:

Money Market Account: An Overview. (2020, October). Investopedia. https://www.investopedia.com/terms/m/moneymarketaccount.asp.
Federal Deposit Insurance Corporation. (n.d.). Bank Accounts. https://www.fdic.gov/deposit/deposits/index.html.
Federal Deposit Insurance Corporation. (n.d.). FDIC: Money Market Deposit Accounts. https://www.fdic.gov/deposit/deposits/moneymarket.html.
NerdWallet. (2020, October). Money Market Accounts. NerdWallet. https://www.nerdwallet.com/blog/banking/money-market-account/.
Deposit Certificate. (2020, October). Investopedia. Investopedia. https://www.investopedia.com/terms/d/depositcertificate.asp.
General Electric Credit Union. (2018, June 15). Differences Between Money Market Accounts and Deposit Certificates. General Electric Credit Union. https://www.gecreditunion.org/blog/money-market-account-vs-deposit-certificate.
University of Nebraska-Lincoln. (2020, April). Money Market Accounts. University of Nebraska-Lincoln. https://money.unl.edu/investment-choices/money-market-accounts.