At first glance, comparing money market vs. savings accounts might not yield many visible differences. While these two financial products are quite similar, there are differences investors should be aware of when deciding how and where to save for the future. Some of the major differences to be aware of are account minimums, applicable fees and associated interest rates. Regardless of your savings goals, knowing the right time to utilize each type of savings account is an important step in constructing your future financial plan.
What is a money market account?
A money market account — not to be confused with a money market fund — is an interest-bearing financial account available through a bank or credit union. Regardless of where you secure your money market account, it will come with an added layer of insured security. Money market accounts from banks are FDIC-insured and money market accounts offered through credit unions are NCUA-insured. These accounts are designed for savings as you’re only allowed six check payments, debit card purchases, drafts or electronic transfers per month. In other words, funds invested in a money market account should be done so with the intent of leaving them there for prolonged periods.
While offered less frequently than traditional savings accounts, this type of account carries significant advantages for those looking to save. Two of the most important and lucrative advantages of these accounts are the ability to write checks, and the interest rate you earn on your money is typically higher. The average money market account interest rate ranges from 0.03% to around 2.00%.
What is a savings account?
Savings accounts are FDIC-insured or NCUA-insured accounts designed to help customers save for the future. Of all the savings tools available on the market, these are the most frequently offered by banks and financial institutions. Like money market accounts, traditional savings accounts are limited to six check payments, drafts or electronic transfers per month. The average traditional savings account range is similar from just below 0.03% to around 2.00%, but when banks offer both, the money market rate is typically the higher of the two.
Money market account vs. savings account
A deeper look at money market vs. savings accounts reveals plenty of pros and cons that future savers need to know. The most glaring difference between the two types of accounts is the available interest rate. Savings tools should help consumers earn additional money on idle funds, and the more earned, the better.
At almost all banks, money market account interest rates will be higher than savings account rates due to the nature of how the bank utilizes your money. If this makes you worried about the safety of your money, don’t worry. Both accounts are either FDIC-insured or NCUA-insured. If you make the mistake of investing in a money market fund instead of a money market savings account, though, the same can’t be said.
In light of this information, the obvious question you’re probably wondering is why anyone would choose a traditional savings account with a lower interest rate. Because most banks require customers to maintain larger balances in a money market savings account, some customers don’t have the minimum deposit on hand to qualify or avoid maintenance fees. Banks reward customers with a higher interest rate when they deposit a guaranteed chunk of funds.
When to use a money market account
Choosing to use a money market account vs. a traditional savings account can help you to grow your savings at a higher rate. While the rate difference might seem small at some banks, the difference compounded over time will add up. If you have enough money to meet the account minimums and plan to park your money in the account for a very long time, you should choose the money market option. Be warned, however, that withdrawing fees to below the account minimum could result in fees.
Additionally, money market accounts have check-writing privileges. But so do most checking accounts.
Yes, your funds are designed to stay in a money market account for a longer period of time, but you still do get up to six transactions a month, which includes electronic transfers. You can easily shift funds into your checking account to write a check, especially if you hold both accounts with the same bank.
Generally, money market funds may be easier to access. Some traditional savings accounts may have more withdrawal limitations than others, and while liquidity is always positive, it might be an issue for those working to build good financial discipline. If you’re new to saving or are worried about dipping into your account too often, you may want to look at a more restrictive option until you build up your confidence.
When to use a savings account
While the higher interest rate may seem appealing with money market accounts, it might not be the ideal choice for everyone. For those of you just starting out on your savings journey, you may not have the level of funds needed to secure a money market just yet. There’s nothing wrong with that as everyone starts at zero when it comes to savings. You can also transition your funds at a later date when you’re ready.
Even if you do have the funds needed to lock in a money market account, you might not have plans to maintain that level of funds in the future. If you’re saving for something short term or plan to access your funds, you’ll want to utilize a traditional savings account. While you will be giving up a small interest rate bump, you’ll keep yourself protected from incurring unnecessary fees if your account dips below the minimum.
The bottom line
Understanding the difference between money market and savings accounts is an important part of building an effective financial plan. While the differences may seem minimal and the rate differences small, over time, you’ll see the earnings gap between the two accounts continue to grow. Figure out your future goals for saving money and pick an option that will be the easiest for you to start with current funds and will grow as much as possible.