A savvy saver or depositor has access to a variety of financial products to help them meet their savings goals. Some of the most popular options include money market and high-yield savings accounts. While both offer interest income and safety of principal, a few key differences are worth exploring. Understanding these differences can help you select the best account for your needs.
Here’s a breakdown of the differences between money market and savings accounts to help you choose the right one for your needs.
What is a Money Market Account?
A money market account (MMA) is a type of deposit account offered by banks and financial institutions. It is similar to a savings account but typically offers higher interest rates. Money market accounts are designed for individuals or businesses who want to earn interest on their surplus cash while maintaining access to their funds.
What is a Savings Account?
A savings account is a basic financial tool that allows individuals to store their money in a secure place while earning an interest rate. High-yield savings accounts, typically offered offered by online banks or credit unions, is a type of savings account that offers a higher interest rate than traditional savings accounts. This means that your money will grow at a faster rate while it sits in the account. Unlike a checking account, which is often used for everyday expenses, a savings account is designed for long-term goal planning and building an emergency fund.
Money Market vs. Savings Account: What's the Difference?
Although market accounts (MMAs) and savings accounts are both types of deposit accounts offered by financial institutions, but they have some differences in terms of features, benefits and requirements. Here's a comparison between money market accounts and savings accounts:
Interest Rates
- MMAs: Money market accounts generally offer higher interest rates than savings accounts. Rates can vary, but MMAs tend to provide a better return on your savings.
- Savings Accounts: Savings accounts offer lower interest rates compared to MMAs. While the rates may be lower, savings accounts still allow you to earn some interest on your funds.
Minimum Balance
- MMAs: Money market accounts often require a higher minimum balance to open and maintain the account. Maintaining this balance is necessary to avoid fees and get the full benefits of the account.
- Savings Accounts: Savings accounts typically have lower minimum balance requirements. Some banks even offer no minimum balance options.
Access to Funds
- MMAs: Many MMAs offer limited check-writing capabilities, which can be useful for making occasional payments. However, there may be restrictions on the number of checks you can write per month.
- Savings Accounts: Savings accounts usually don't offer check-writing capabilities. Transactions are primarily conducted through electronic transfers, ATM withdrawals or visiting a bank branch.
Transaction Limits
- MMAs and Savings Accounts: Both MMAs and savings accounts are subject to federal regulations that limit the number of certain types of transactions to six per month. These transactions include transfers and withdrawals.
Fees
- MMAs: Some money market accounts may have monthly maintenance fees. However, these fees are often waived if you maintain the required minimum balance.
- Savings Accounts: Many savings accounts have no monthly maintenance fees, especially if you meet specific conditions set by the bank.
Account Flexibility
- MMAs: Money market accounts may offer slightly more flexibility due to check-writing capabilities. However, they still have limitations on the number of certain transactions you can make each month.
- Savings Accounts: Savings accounts are simpler and straightforward, but they may offer fewer features compared to MMAs.
Security and Accessibility
- MMAs and Savings Accounts: Both types of accounts are generally considered safe and secure, as they are typically insured by the Federal Deposit Insurance Corporation (for banks) or the National Credit Union Administration (for credit unions) up to the maximum limits.
Money Market vs. Savings Account: Pros and Cons
Each type of account has its own benefits and drawbacks, which depending on your objectives may be a deal-breaker.
Money Market Accounts
Advantages
- Offers liquidity, allowing account holders to make withdrawals or transfers whenever needed. This flexibility makes MMAs a convenient option for those who need quick access to their funds
- Often have higher interest rates than traditional savings accounts, but rates can vary depending on the institution and market conditions
Disadvantages
- Some have minimum deposit or ongoing account balance requirements.
- Some charge higher annual or monthly maintenance fees or fees for additional transactions and check and debit card services.
Savings Accounts
Advantages
- Allows you to earn interest on deposited funds, which can help your money grow faster compared to a checking account.
- Insured by the government up to $250,000 per depositor
- Allow easy access to funds, with limitations on the number of withdrawals. Funds can be transferred to a checking account or withdrawn from an ATM, providing flexibility for unexpected expenses or financial goals.
Disadvantages
- Pays a lower interest rate compared to money market accounts or CDs.
- Savings accounts don’t give you the ability to write checks or pay bills from them as they are intended for holding cash only.
Who Should Use a Money Market Account?
Money market accounts are best suited for savers trying to earn interest while still desiring some of the features and flexibility seen in checking accounts. Examples include:
- Students: A money market account is a great place to hold future tuition payments as you can earn interest and write checks or conduct online banking transfers from it.
- Spenders: If you plan on writing cheques or using a debit card frequently, a money market account can be a great way to complement your regular checking account while earning higher interest.
- Homebuyers: A money market account can be a good way to store a down payment for a home with no risk while earning interest. Savers who don’t want their money locked up in a certificate of deposit (CD) can use the flexibility of a money market account.
Who Should Use a Savings Account?
Savings accounts are a great one-size-fits-all, general option suitable for a variety of savers thanks to their liquidity and accessibility. They can be a great place to sweep leftover cash. Examples include:
- Workers: A savings account can be a great place to start an emergency fund with three to six months of cash. Unlike a CD, you can withdraw the funds in your savings account at any time.
- Retirees: A savings account can be a good way to hold enough cash for a year or two of living expenses in case of a market downturn that results in your retirement portfolio suffering losses.
- New bank customers: A savings account is a necessity for people opening their first bank account. Alongside a checking account, having a savings account can encourage good personal finance practices like setting aside cash and learning how interest works.
Money Market vs. Savings Accounts: Which Should You Choose?
The choice between money market vs savings accounts depends on financial goals and preferences. Money market accounts offer higher interest rates and more flexibility, while savings accounts have lower interest rates but fewer fees and restrictions. Factors such as interest rates, fees, minimum balance requirements and financial needs should be considered before making a decision. Both can be researched and compared via various platforms. Investors looking for further insights and reviews of money market rates and online savings accounts can use Benzinga to compare the best rates for each.
Frequently Asked Questions
Is a money market account better than a savings account?
The choice between a money market account and a savings account depends on your financial goals. If you want high-interest rates and the ability to write checks and use a debit card, a money market account is ideal. If you want a safe place to store cash without the temptation to spend it, a savings account might be better, especially for beginners with small accounts.
Is a money market or savings account safer?
Both money market and savings accounts are equally safe. Both are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) for up to $250,000 per account holder per bank. If you’re planning on depositing more than $250,000 in a savings or money market account, consider spreading the amount over accounts at several banks to not exceed the insured limit.
What is the downside of a money market account?
One downside of a money market account is that the interest rates are typically lower compared to other investment options such as stocks or bonds. Additionally, there may be restrictions on the number of withdrawals you can make each month, which can limit your access to your funds in case of emergencies. Some MMAs may also have minimum balance requirements or fees that can eat into your earnings.
