How Do Money Market Certificates Work?

You can shop around for the highest-paying money market certificates.

You can shop around for the highest-paying money market certificates.

A person can invest in a wide variety of financial instruments that have varying degrees of risk and return. You have several options for the portion of your investments devoted to insured savings. For example, you can open a savings account or purchase a certificate of deposit from a bank. CDs sold by credit unions are called money market certificates.

Credit Unions

A credit union is similar to a bank, but is non-profit and serves the interests of its members rather than those of investors. Its chief focus is to provide safe savings and affordable loans. A credit union distributes any surplus earnings as dividends to its members. To become a member, you normally must meet some requirement, such as living in a particular area or working for a certain set of employers. The National Credit Union Share Insurance Fund insures most credit unions accounts. This insurance covers up to $250,000 per account.

Money Market Certificates

Because credit unions are not banks, they substitute certain words for terms used by banks. For example, you might have a bank deposit that earns interest, but in credit union lingo, you own credit union shares that earn dividends. Money market certificates are what credit unions call CDs. A money market certificate earns a specific dividend when held for a set period. If you cash in your money market certificate before its maturity date, you’ll have to pay a penalty, such as the loss of some dividends.

Better Rates

Compared to banks, credit unions normally offer higher interest rates on savings and charge less for loans. They can do this because they don’t have to pay dividends to investors, only to members. This allows them to plow any excess earnings back into the business by offering better rates. For example, in October 2013, banks in the Knoxville, Tennessee area -- excluding online-only banks -- typically offered one-year CDs with a 0.10 percent interest rate. The local credit union offered one-year money market certificates for 0.30 percent.

Money Market Accounts

If you don’t want to tie up your savings in a money market certificate or CD, you can open an insured money market account at your bank or credit union. These accounts offer variable interest rates that may increase for larger deposits. Money market accounts normally allow you to write a few free checks each month, and to withdraw money at any time without penalty. You might also consider a money market fund offered by a mutual fund company or brokerage. These provide competitive rates and allow you to park money while deciding upon other investments.

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