Are Money Market Accounts A Good Investment?

	Starting Deposit	Canopy CU Rate	Annual Earnings	Total Balance
Year 1	$20,000	0.025	$500	$20,500
Year 2	$20,500	0.025	$513	$21,013
Year 3	$21,013	0.025	$525	$21,538
Year 4	$21,538	0.025	$538	$22,076
Year 5	$22,076	0.025	$552	$22,628

Can You Lose Money from Money Market Accounts?

Money market accounts are insured by credit unions under FCUA and banks under FDIC. You cannot lose money directly if the stock market crashes. However, you can lose money from money market accounts indirectly in three ways:

• The amount of funds past coverage. Since the FCUA and FDIC cover only up to $250,000 in money market accounts, the above amount will not be recovered. To avoid this, ensure that each money market account balance is only below the covered amount. 
• Falling interest rates. Money market accounts are earned by the interest rates based on the money market. If the interest rates fall, the return value also falls.
• Penalty fees. Penalty fees charged by credit unions and banks can make you lose money, such as withdrawing beyond its limited number of transactions.

Are Money Market Accounts a Good Investment? The Short and Long Answer

The short answer: A money market account is not a good investment for long-term purposes such as retirement.

The long answer: Money market accounts are best for those who need a large sum of money in a few years but need to access their funds occasionally. 

For example, you may be planning to use this year's savings to fund a college fund, tax payment, or vacation. Any savings account with high interest will do.

But what if your car breaks down and needs repairs? 

Then, you'll need a savings account that you can conveniently access with a debit card, and it won't penalize you for touching your funds. That's when we recommend money market accounts.

Short-Term Investments: Money Market Accounts vs Other Savings Accounts with High Rates

Money market accounts have two advantages over other high-interest savings accounts: liquidity and direct access to funds. Every person's financial situation is unique, so choosing the right account for short-term savings is important to avoid penalty fees or unnecessary costs.

• Money Market Accounts vs High-Yield Savings Account

A high-yield savings account is like a money market account. Both earn high interest and have limited withdrawals. However, a high-yield savings account can have lower to no minimum balance requirements and give people less direct access to their funds.

Do you want direct access to your funds? The money market account is more suitable for you.

If you don't need to write checks or make ATM withdrawals with your funds, you may be more suitable with a high-yield savings account.

• Money Market Accounts vs Share Certificates or Certificates of Deposit

A share certificate offered by credit unions or a certificate of deposit (CD) in banks has fixed interest rates. Meanwhile, money market account rates can fluctuate. Due to their fixed rates, share certificates or CDs are more stable than high-yield savings accounts and money market accounts. They have maturity periods of six months to ten years. If you withdraw from it prematurely, you will be penalized.

Do you value liquidity? Then, consider money market accounts.

If you are comfortable investing your money without spending portions of it for a long time, consider share certificates or CDs.

Long-Term Investments: Money Market Accounts vs. Stocks, Bonds, and Mutual Funds

There are many forms of long-term investments with higher rates, and returns are suitable when you are okay with not touching your invested money for more than five years. Here are some examples.

• Stocks are shares bought as part of ownership of a business. If the business does well, the investor receives a share, depending on the amount invested.
• Bonds are fixed-income assets that pay interest to the investor until their maturity period, at which point the business pays the face value of the bond back to the investor.
• Mutual funds are a variety of securities managed by a mutual fund manager for the investor.

Below is a graph comparing the annual interest rate of Canopy CU money market accounts against the average annual interest rates of long-term investments, such as stocks, bonds, and mutual funds.

S&P 500 index reports that the average annual interest rate for the stock market is 10% (not counting for inflation). 

For government bonds, we utilize the average long-term government bond rate of 4.39% from the Economy as of June 11, 2024.

For the average annual interest rate of mutual funds, we use the annualized 15-year return of the S&P 500 company as it reflects 500 of the largest companies in the US, which is 12.4%.

**rates as of Jun 11, 2024

If you're comfortable not using your funds for more than five years and earn higher rates than money market accounts, then long-term investments are for you. While most investments are not insured by credit unions and banks, a financial advisor can help you make the optimal investment with minimum risks.

Finding the Right Investment Strategy for You

At Canopy Credit Union, we work one-on-one with clients on their personalized investment strategies. Through our collaborative and transparent methods, you'll know where you stand today in terms of your money and where you'll land tomorrow. Contact us today to learn how to make your financial goals possible.