Money Market vs Savings Accounts
As a young investor, you’re analyzing the market and looking for the best place to park your money for maximum stability and growth.
At this stage in the game, two common financial options to consider are money market accounts and savings accounts. While they appear to be very similar, there are some important differences you need to know before deciding which one works best for you.
Saving Your Money: An Overview
When you decide to save money, you generally open a bank account. This action is only possible when you trust the financial institution to protect your funds and keep them safe from market volatility. After you’ve opened an account for savings purposes, you’ll then need to decide whether to open a regular savings account or a money market account, which are offered by both banks and credit unions.
What is a Bank?
A bank is a for-profit financial institution that is officially licensed and accredited to be able to make loans and receive deposits. U.S. banks are insured by the Federal Deposit Insurance Corporation (FDIC), which protects deposits of up to $250,000.
What is a Credit Union?
A credit union is a money cooperative that enables members to borrow from shared deposits with low interest rates. Credit unions are considered nonprofits and are insured by the National Credit Union Administration (NCUA), which also protects up to $250,000.
What’s the Difference Between Savings and Investing?
When you invest, you lose the security of an FDIC-insured account. While mutual funds, index funds, and individual stocks typically have much higher growth potential than savings accounts, they can be risky. You could lose a lot of money if an investment goes wrong, and quickly, especially if you treat your investments like lottery tickets instead of ownership in companies you believe in.
Most financial consumers today choose to save and invest simultaneously to protect themselves while still increasing their overall net worth.
What is a Savings Account?
A savings account is a type of interest-bearing account offered by a bank that customers can use to harbor their money.
A savings account can be used for short-term savings or long-term savings. The type of account you select for your savings should correlate with your overall financial goals and savings strategy.
Types of Savings Accounts
A traditional savings account or deposit account typically offers low interest rates. However, it can give you the flexibility to move money around or make a limited number of withdrawals during a billing cycle. And, if you’re able to maintain a higher minimum balance above a predefined threshold, you may be able to earn a better interest rate (check with your bank to see if they offer a product like this).
Deposit accounts are subject to Regulation D, which restricts consumers from making more than six transfers or withdrawals over the course of a month.
High-Yield Savings Account (HYSA)
In recent years, a new type of savings account has emerged with HYSAs. This type of account is offered by an online-only bank and typically has a much higher interest rate than a traditional financial provider.
For example, American Express offers a HYSA that currently has an annual percentage yield (APY) of 0.60%, with no minimum balance requirement and no maintenance fees either. In comparison, a traditional Advantage Savings plan from Bank of America offers an interest rate of 0.01%, with a minimum deposit of $100. No thanks!
Like regular deposit accounts, HYSAs are bound by Regulation D. In addition, it’s important to remember that HYSAs don’t usually have brick-and-mortar bank locations, and they also don’t typically enable ATM withdrawals. So if you want to access a certain amount of money, you have to transfer it to another account first.
Certificate of Deposit (CD)
One of the downsides to using a HYSA is that it comes with varying interest rates. In 2019, most HYSAs were hovering around 2%. Then the Federal Reserve cut interest rates, and HYSA payouts plummeted.
One way to combat varying interest rates is to open a CD, which is a type of fund that allows you to park your money for a fixed period of time at a fixed APY. CD terms can range from one month to 10 years.
CDs are great if you want to maximize stability and avoid losing funds due to volatility. However, they can also make it harder to liquidate your money due to early withdrawal penalties. Some banks penalize you by wiping out interest gains for certain time periods if you touch your money early.
Pros and Cons: Savings Account
- Stabile growth for protection against market volatility, with FDIC and NCUA protection guarantees
- Opportunities for strong interest rates through HYSA
- Moderate liquidity
- Limited growth potential, even with HYSAs
- Federal withdrawal limits
- Varying interest rates
What is a Money Market Account?
A money market account (MMA) is another type of interest-bearing account offered by most credit unions and banks. It’s designed to operate as a mix between a checking and a savings account, giving consumers more flexibility with their money.
Benefits of a Money Market Account
With a money market account, you can typically write checks or make withdrawals using a debit card. However, it’s still technically considered a non-transaction account by the federal government, and therefore it’s bound by Regulation D.
Money market accounts offer the stability of a traditional savings account with a higher interest rate. You can use money market accounts to receive better returns on your holdings than you’d typically get from an average savings account.
Money market accounts are protected by the FDIC and NCUA. If you open one, you’ll receive the same federal protections that you would when putting money into a savings account.
Tips for Using Money Market Accounts
Shop for the Best Plan
If you decide to open a money market account, make sure to shop around for a plan that offers the highest interest rates and minimal monthly fees. There are many money market accounts available today from providers like Ally Bank, CIT Bank, and First Internet Bank. Like anything else, do your due diligence and research your options before deciding which institution to trust with your money.
Try Not to Touch Your Money
One of the hard parts about having a money market account is that it can be tempting to treat it like a checking account. However, a money market account is not a checking account and shouldn’t be used as such, Otherwise, you’ll quickly burn through your monthly transaction limit. Consider working with a bank that allows you to link a money market account to a checking account. That way, you can transfer funds as needed to avoid any penalties.
A Money Market Account is Different from a Fund
It’s also important to remember that a money market account is different from a money market fund.
The latter is a type of mutual fund that invests in liquid, near-term instruments—like cash and cash equivalent securities with high credit qualities.
As with most investments, money market funds offer the promise of higher returns with the risk that your investment can lose value if the market takes a downturn.
Pros and Cons: Money Market Account
- High interest rates
- More flexibility to use your account with ATM cards or for check-writing
- Federally backed security guarantees by the FDIC and NCUA
- Potentially higher minimum balance requirements
- Limited liquidity due to Regulation D
- Easier accessibility makes it easier to spend
Below are answers to some of the most common questions I receive about money market and savings accounts.
Is a money market fund a money market account?
A money market fund is inherently different from a money market account.
The former is a type of mutual fund while the latter is a secure savings vehicle offering high interest rates. Money market funds are for investing and money market accounts are for saving.
What’s the best way to maximize interest in short-term savings?
The best way to maximize interest with short-term savings is to open a high-yield savings account (HYSA) or a money market account with a high interest rate that is well above market average.
By putting your money into an HYSA or money market account, you’ll be able to get a stronger return while having the flexibility to access your money when you need to.
A short-term CD might be useful, too. But remember, you may incur a penalty if you access your funds too soon.
Should you use money market accounts to pay credit cards?
If you have credit cards, it may be advantageous to allocate a portion of your savings into a high-earning money market account that you can withdraw from when making payments. This way, you always have money on hand to pay your bills if you exceed your spending limits.
For example, suppose you have a monthly budget of $1,200 but you wind up going overboard with holiday spending. In this case, you can take money out of your money market account to pay down the balance instead of letting it carry over and accrue interest.
Is it good to use savings accounts with mobile banking?
It’s always useful to have on-the-go access to your money. However, most mobile banking apps are for making quick transactions like investments or purchases. Mobility shouldn’t necessarily be a dealbreaker for a savings account or money market account.
What is an emergency fund?
An emergency fund is a type of savings account designed to help you pay the bills when things take a turn for the worse in life — like job loss or extended illness.
Generally speaking, you should save enough to account for at least six months of expenses. By keeping the money in a savings account or money market account, you can protect your money and benefit from high interest rates while still having enough liquidity to access the money when it’s required.
What is an overdraft?
An overdraft occurs when you withdraw more than you have in your account. Some banks apply overdraft fees while others pull money from an overdraft protection plan using a linked account.
In some cases, if you overdraft your account, you can call the bank and ask for forgiveness. As long as you don’t do it often, the bank may choose to forego the fee to keep your business.
The best way to prevent an overdraft is to keep close tabs on your daily balances and have a clear understanding of what’s coming in and what’s going out. You should also be careful about setting up automatic payments unless you have plenty of money in your account.
How do online banks compare with brick-and-mortar banks?
Since they are digital, online banks do not have as much real estate as their real-world counterparts. As a result, they operate much leaner and more efficiently, and are in turn able to offer more competitive interest rates.
The tradeoff is that online banks often have suboptimal customer service. For example, most providers don’t have branches you can walk into for quick support. So, if you value face-to-face transactions, you’ll probably be best off opening an account at a larger national bank.
Before you do that, ask yourself what you’re actually getting out of that face-to-face interaction. Someone remembering your name and giving you a friendly smile may not be enough to justify doing business with that company — even if they are a trusted member of your community.
If your goal is achieving financial independence, look around for the best rate to get the most out of your money.
The Bottom Line
There is a lot to consider when deciding between a money market and savings account. Like any other financial decision, it’s not always easy to determine which is the right option for your personal finance needs.
Here’s the great part, though: You can have both types of accounts.
Oftentimes, financial consumers leverage money market accounts alongside savings accounts and use them for different purposes.
For example, you may have a money market account to make mortgage or rent payments, an HYSA to save for car repairs, and a deposit account to process paychecks from work. As long as you can stay on top of these various accounts, there’s nothing wrong with spreading your money around and using different financial institutions.
Here’s another piece of advice: Do your own research and avoid following the advice of an editorial team or sales professional. Savvy savers are always aware of the latest market conditions and rates and make decisions accordingly.
Work toward becoming the master of your own money, and you’ll have an easier time making smart financial decisions. If there’s one thing you’ve learned from this article, let that lesson be it.