Updated on 09.03.14

Personal Finance 101: Money Market Accounts Versus Normal Savings Accounts

Trent Hamm

pf101Kathleen writes in with a good question:

A lot of personal finance books I read suggest putting your savings – especially stuff like emergency funds – in money market accounts. I’ve looked into them but I can’t figure out what the difference is between a money market account and a savings account. Why is a money market account preferable? What’s the difference?

Understanding Money Market Accounts

Money Market Deposit Account

First of all, let’s get some terminology straight. Most of the time, when a personal finance book refers to a “money market account,” they’re talking about a money market deposit account. A money market deposit account is a specific variation on a savings account that many banks offer.

Money Market Funds

Sometimes, the term “money market” is used to describe money market funds, which are an investment vehicle not insured or backed by the FDIC and thus not a place you want to put your liquid cash savings.

Money Market Acounts vs. Savings Accounts

Normally, when you deposit money in a savings account, the bank is extremely limited on what they can do with that money. For the most part, the only thing they’re allowed to do with normal savings account deposits is loan that money out to people who need to borrow money, charge the person borrowing a solid rate, and then pay you a part of that rate when it’s paid back. For example, the bank gets deposits that they charge 1% interest on, lend that money out at a 6% interest rate, then keep the 5% difference as their own income (gotta pay the bills, after all).

A money market deposit account is a bit different. The restrictions on what a bank can do with that money are somewhat looser – they can often invest that money in things such as treasury notes, certificates of deposit, municipal bonds, and so on in addition to the tight restrictions of a normal savings accounts. In other words, the bank can take your money and invest it in other investments that are very safe.

For you, the consumer, the differences aren’t that big. Both a normal savings account and a money market account are FDIC insured, meaning the federal government guarantees your deposits up to $100,000. Both types of accounts have some basic restrictions on how often you can withdraw from them, set by a mix of government regulations and bank policies, but for the most part, you’re limited to six withdrawals a month from either type of account.

Commonly, savings accounts at your local brick-and-mortar bank have a pretty low interest rate, but online-only banks (such as my bank, ING Direct) offer rates between 3 and 4% on deposits, with introductory rates sometimes higher than that. Money market accounts offer a rather wide range of rates and these rates often go up and down pretty regularly depending on the investments available to the bank.

Also, money market deposit accounts often have a few additional restrictions and benefits. Some may require a minimum balance; others require you to wait a few days (up to seven) for withdrawals. Some money market accounts, however, allow you to write checks from the account – often up to three a month. Consult the specific policies of any money market account you’re considering to see whether these restrictions and features are present.

In the end, for most people, a money market deposit account is essentially equivalent to a savings account. At your local bank, the money market account is probably a substantially better deal, as local brick-and-mortar savings accounts offer atrociously low interest rates. If you’re comparing with online offerings, though, quite often normal savings accounts offer rates very competitive with money market accounts and offer solid rate stability with no minimums.

Either way you go, savings accounts and money market accounts are the place you should keep your savings, especially if the money is for an emergency fund or another short term goal.

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  1. Big Winner says:

    You convinced me at least! I finally closed my savings account, but I am still tired of the atrociously low rate for my interest-bearing checking account, so I always have to remind myself to not keep too much money in it.

  2. "Mo" Money says:

    Good post! I didn’t know the difference and thought a money market deposit account was something completely different that was only offered by brokers. Thankf you.

  3. Carolyn says:

    Six withdrawals a month? I’ve never heard of that. None of the savings accounts I’ve had in the last 15 or so years (with four different banks) had any limits on the number of withdrawals, whether regular savings or passbook.

  4. Sara says:

    I have previously used CD accounts as means to have some interest added to my money and keep it in a safe place but that I could get it back in case I had an emergency and needed it fast.

    In the following year, when time came for IRS, I had to declare the interest I got from the CD accounts. I did an experience and saw that, had I not invested my money, I would get more money back from the government than I was really gonna get. Plus, that amount was extremely close to the amount of interest I got from my investiment. That made me really mad because of of the time and energy I spent trying to decide what investiment would be safe, saving money and putting into this account etc.
    Had I not invested the money, I would get it anyway…

    Do you have any idea of how to prevent that? Are there investiments that are less prone to government getting their “share” than others?
    Can you coment on the reason why that happens. Does it happens to everybody? If it does, that is NOT an incentive to save money and invest…

    Thanks! Sara

  5. Meri says:

    Currently my emergency fund is in a traditional savings account at my credit union and I receive less that 1% interest on it. I’ve considered moving it to my ING savings since it pays about 3%, but I’m concerned about not having instant access to the money in case of an emergency since it usually takes a few days for the transfer to occur from ING to my bank account.

    Any insight or words of wisdom about that? Should I leave my emergency fund right where it is, where I can access it within minutes, or move it to the ING account for the slightly better interest rate?


  6. emilymorgan says:

    Meri, consider getting an electric orange checking account from ING and linking it to your ING savings account. You’d then have debit/ATM access to your money.

  7. Good post. I always thought that MMA are not FDIC insured that’s why I have gone for the interest checking/savings accounts.

    Online Dividends

  8. AndyS says:

    While they are slightly different rules for these type of accounts (Eg ATM cards not permitted for MMA), they are essentially the same in terms of purpose. Historically, MMA have been higher yielding though of late with tightness in the credit markets, online savings offer better yields. However as I wrote about recently you need to be wary that MMA’s or online savings become your primary form of investing.

  9. The Weakonomist says:

    Well written post, I’ve been trying to write up something like this for a while. Thanks for saving me the effort.

  10. Heather says:

    banks named money market accounts similarly to the preexisting money market funds (of brokerages) because customers were shifting their cash savings to the extremely safe, and higher yielding funds. So it is intentionally confusing.

  11. Ariana says:

    Thanks for the clarification! I tried to get a good explanation from my bank and ended up with a bunch of jarble.

  12. Great clarity on this issue, Trent. You have a gift for making complex concepts understandable. Maybe you could extend your services by providing seminars for bank and brokerage employees.

  13. cv says:

    It can be hard to tell which type is which, so be careful. My brokerage account comes with a money market checking account with debit card, checkbook, bill pay, etc., and it’s the place that money comes in or our of when you buy or sell securities or receive interest or dividends. However, it’s a money market fund and not a money market deposit account, so it’s not FDIC insured (though it is covered by the SIPC insurance of the brokerage firm). Read the fine print.

  14. Desiree says:

    I have an ING Savings account for my emergency fund and also an ING Checking account which earns interest too. Both accounts can be viewed when I log into the website. The nice thing about this set up is that I have a debit card for the checking account. If for any reason I need to access my emergency funds in the savings account, I can just log on and transfer the funds to my checking account which I can then immediately withdraw using my debit card. The funds in the savings account do have to be “available” in order for you to transfer into the checking account.

  15. Yeah, Trent. I love your Sanford and Son approach to writing about such issues, which for me is basically saying “OK, yuh big dummy, this is how it works.” But that is good. I am willing to bet that only 40 to 50 percent of people really know the difference between these two things. I certainly did not before reading your article and I have money in BOTH savings accounts and an online money market account. Sometimes I feel stupid for not knowing where my money actually is but I am glad you put stuff out there like this for people like me.

    Are you going to bring back some more Great Debates, too?

  16. Yuliya says:

    I disagree with “…money market funds, which are an investment vehicle not insured or backed by the FDIC and thus not a place you want to put your liquid cash savings.” Just because they are not FDIC insured does not necessarily mean they are not safe. From what I’ve read, they are safe and a great place for liquid savings.

  17. Trent, it is like you were reading my mind — I was just wondering about this earlier today. It is a little surprising to me that there is almost no difference to the end consumer — in that case, it seems like it makes sense to just chase the best rate. Anyway, thanks for the answer!

  18. AJ says:

    My question is just like Meri’s. How does the transfer period work? I was told it takes three days to transfer $ at the bank I looked into. Unfortunately they were unable to explain the process. Will the $ still appear in my money market account during the three day waiting time? Will it appear in my checking account w/some kind of note attached to it? Will the bank send me an eMail saying the transaction was completed?

    Would love to hear from others about how the process works. As a former technical writer (and always anal person) please be specific. Thanks!

  19. Whitney says:

    I can’t say I agree with you when you say money market funds may not be a good place to place your savings in. From what I’ve heard the rates you get on an online savings account are not fixed and can be changed arbitrarily by the bank. Also sometimes after tax, money market funds may actually come out ahead. Here’s a useful link regarding money market funds: http://thefinancebuff.com/2007/04/which-vanguard-money-market-fund.html

  20. almost there says:

    Meri@ comment #3: Open up a USAA checking account, you do not have to be affiliated with the militay. They credit any money transfered instantly for the first $1000 of it is more than that. If I deposit a check by scanning it into the account it is credited instantly. Dirct deposits are usually credited the day before the actual date of deposit. The 6 withdrawls per month is the same with them from savings. I believe this is the rule with all savings accounts now.

  21. Lurker Carl says:

    @Meri and AJ – In my experiences, the transfer from on-line savings to hometown checking happens within 48 hours. But I have yet to have any sort of emergency where I needed immediate access to my emergeny fund. Unless you are living on the financial edge, instant access to all your cash isn’t necessary.

    For me, credit cards have always been sufficient to get the ball rolling in emergencies. That’s why it’s critical to keep cards paid off each month, they provide instant access to lines of credit that have a 3 week grace period with cash-back bonus rewards.

    However, there are always infrequent times when you need instant access to money. Don’t depend on the bank being open or an ATM working. It’s better to keep several hundred dollars in small bills on-hand for a different sort of emergency, like when you have to leave home immediately or area wide power outage make electronic transactions impossible.

  22. Todd A says:

    Unless it has changed substantially since my days in banking, the main distinction of a money market (or savings) account at an FDIC insured bank, is the limitation on certain types of withdrawals. While individual banks may implement a more strict limitation on these transactions than the FDIC requires, the FDIC limitations have a main purpose; determining a reservable amount on those deposits that the bank must maintain for liquidity purposes. Obviously, a bank is required to maintain LESS reserves on a low transaction account (i.e. money market/savings account) than on a “DDA”(Demand Deposit Account, aka checking account). That’s why you see the 3 per month (or whatever it is) limitation on certain money market/savings withdrawals.

  23. doctor S says:

    Currently I am the rutt that my emergency fund IS my savings account. A bad practice, I know, but it is what I am faced with at the moment. But what you wrote about is a common misconception and I found myself definately getting my facts straight from your info, especially about which acocunts are not FDIC insured!! Great work!

  24. Karl says:

    To people questioning the transfer time: if you can’t live for 48 hours while waiting for some cash to transfer from your savings account, why do you even have a savings account? It sounds like you are living on the edge of bankruptcy.

    You should be able to live off what’s in your chequing account for the two days. If it is a sudden, large, unexpected bill that needs to be paid instantly, you can always put it on a credit card, and then pay off the credit card in a few days after you get the money out of your savings account.

    For anybody with a significant amount of savings, the two day transfer period should not be an issue.

  25. Stephanie says:

    Keep in mind that the transfer period could be as long as 10 business days. I have an online money market deposit fund with a bank that is not in my state. When buying a house recently, I had to transfer large amounts out of this fund to my regular checking account. The funds were “on hold” for 10 business days because the deposit exceeded $5000. I knew this beforehand, so I transferred well before I needed the cashier’s check to take to closing.

    Writing checks directly from the money market deposit account for the emergency expense solves many of the transfer issues. Using credit cards to float the money solves others. As a last resort, wire transfers are also available (for a fee).

  26. Meri says:

    Thank you to those who replied. Reading some of the responses I guess I have the wrong definition of “emergency.” I’m not on the edge of bankruptcy, but at the same time if an emergency does occur that I need a large amount of money immediately, I guess the best place to have it would be my standard savings account instead of a money market account or an ING account. I don’t have any credit cards, don’t want them, had enough “fun” with them in the past and don’t want to play that game again.

    Thanks for the explanation about money markets, Trent. I’m learning a lot from your columns.

  27. majortom1981 says:

    I am getting 3.06 % on my money market account at my local credit union. Sometime it gets higher then that.

  28. gr8whyte says:

    @ almost there : USAA is no longer available to the general public. Sometime in the summer of 2006 or 2007, the board decided to make it only available to military personnel and relatives of. That’s what they told me when I tried to open a checking and savings account with them then. The policy is not explained on their web site. USAA claims 3 day waits on fund transfers; in my experience, it can take up to 4 days. Another sticky wicket is USAA’s policy of not allowing more than outgoing k$5/day EFTs in totality. USAA’s no longer competitive on savings interest rates. They do respond to email but good luck with getting written answers on critical stuff (as with any other bureaucracy).

  29. almost there says:

    @ gr8whyte: Thanks for the USAA info and correcting me on their more restricted membership. I have noticed my savings interest % has gone down quite a bit this year. I use them because of their customer service. If the savings goes lower I will move my savings to ING direct. Currently I have a 0% BT with no BT fee on their mastercard for 18 months. I will pay it off by the end of the term. I agree their loans are too pricy, cars, homes, HELOC, etc. I joined Pentagon Federal Credit Union by joining NMFA, National Military Families Association as anyone can. I am happy with their loans.

  30. B-flat says:

    Note that money market accounts often have variable interest rates, meaning that rates rise and fall as the Fed changes rates. For example, many MMAs now have rates in the neighborhood of 3%, but last fall might have been closer to 5-6%.

    A CD’s interest rate is “locked.” Something to consider in these inflationary times.

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