Money Market Account vs Savings: Which Is Better for You?
Learn the differences between money market accounts and savings accounts, both of which are commonly used for saving money.
Contributing Writer at Tally
November 3, 2021
There are numerous types of savings vehicles available. Choosing the right savings strategy can be overwhelming, especially when you’re first getting started.
A recent study by Bankrate.com found that 21% of Americans don't put away any of their annual income. When participants were asked why they weren't saving, the second-leading reason was that they "hadn't gotten to it," while expenses were the leading reason and debt actually ranked fourth.
There are two vehicles that are commonly used when savers first get started — money market accounts (MMAs) and traditional savings accounts. Below, you can find an in-depth money market account vs savings account comparison, learn the pros and cons of each and discover how they could benefit your personal finances and efforts to achieve your financial goals.
What is a money market account?
A money market account is a type of account typically offered by banks and credit unions that has characteristics of both checking and savings accounts. It is similar to a checking account in that you can write checks from it. Some financial institutions may even offer you a debit card with your money market account that you can use to make purchases and ATM withdrawals.
The difference between a money market account and a checking account is the interest rate you'll receive. Money market accounts typically offer higher interest rates, meaning your balance will accumulate more interest.
Additionally, a money market account typically offers a higher interest rate than a regular savings account. But in return, you’ll likely have higher minimum deposit and balance requirements with a money market account than you would with a savings account.
It's also worth noting that there’s a distinct difference between money market accounts and money market funds. The terms are not synonymous, as money market accounts are a type of bank product while money market funds are a type of mutual fund. A mutual fund is an investment vehicle rather than a bank account.
Because they’re an investment vehicle, mutual funds are not FDIC-insured. Though it's not necessarily a given, nearly all banks that offer deposit accounts — including money market accounts and savings accounts — are backed by the Federal Deposit Insurance Corporation (FDIC). This means that if your bank were to go under, up to $250,000 of your assets are recoverable.
What is a savings account?
A savings account offers a safe place for you to store your money and is also typically offered by both banks and credit unions. It’s a low-risk way to put your money in an interest-bearing account.
There are a couple of different types of savings accounts available:
Traditional/regular savings accounts are perhaps the most common type of savings accounts. In fact, your bank or credit union may automatically open one when you open a checking account. Regular savings accounts usually offer lower interest rates than money market accounts. But as a tradeoff, you’ll generally have lower thresholds for your initial deposit and balance requirements than you would with an MMA.
High-yield savings accounts have higher annual percentage yields (APYs) than regular savings accounts, which means you earn more in compounding interest. Online banks typically offer these higher rates of return because they don't have to worry about the overhead expenses that brick-and-mortar banks have to pay.
No matter which type of savings account you have, they usually don’t come with the check-writing capabilities that checking accounts or money market accounts offer. You may receive an ATM card to make cash withdrawals and deposits, but you likely won't receive a debit card.
What are the pros and cons of a money market account?
When determining whether a money market account is right for you, it's important to weigh the pros and cons. Below are a few important ones to think about.
Pros of a money market account
High liquidity - One of the pros of a money market account is high liquidity. Not only can you transfer money in and out of the account, but you can also write checks and withdraw money from an ATM.
Easy access - Having easy access to your money can be especially helpful if you plan to use the account as a rainy day or emergency fund, as you may need to access money quickly to cover an unexpected expense. Even if you put an emergency expense on a credit card, having easy access to the cash in your account means you can quickly transfer money and pay off the balance in full. This can help you avoid taking on credit card debt.
High interest rate - Another pro of a money market account is the high interest rate. Putting your money in an interest-bearing account allows your funds to work for you.
Cons of a money market account
Minimum deposit and minimum balance requirements - If the amount of money in your account falls below a certain threshold, your financial institution may charge you penalties. These requirements are often higher for money market accounts than they are for savings accounts. There may also be monthly fees associated with money market accounts.
Temptation to spend your funds - Because there is such high liquidity, you may be tempted to spend your money. Having a debit card linked to the account removes a layer of security. You may be more tempted to use the funds in your money market account than to let them sit as savings.
Withdrawal limits - Money market accounts are subject to Federal Reserve Regulation D requirements. This means you’re limited to six withdrawals or transfers per month, including debit card transactions. If you make more than six transactions per month, you will be subject to penalty fees (although this may help to curb the temptation to spend the money you’re saving in your MMA).
What are the pros and cons of a savings account?
Below is a list of some of the main pros and cons associated with savings accounts.
Pros of savings account
Increased returns while maintaining liquidity - Savings accounts stand out because they often offer higher interest rates than checking accounts. Unless you plan to use your money in the short-term, storing reserves in a savings account can increase your returns while still allowing you to maintain liquidity.
Less temptation to spend your funds - You won't be able to write checks or spend funds directly with a debit card, but this could end up protecting your funds as they’re not as easily accessible. The longer you leave your money in savings, the more your balance will grow.
Still more accessible than some savings options - Even though your funds are not as accessible as they would be if you had a money market account, they are still more accessible than if you used an alternative savings option. For instance, a certificate of deposit (CD) locks your money in for a certain period of time and has early withdrawal fees.
Lower deposit and balance requirements - Savings accounts tend to have lower deposit and balance requirements than money market accounts. So, even if you only have a bit of extra cash, you can put it into a savings account to start earning interest. This can be a great tool to help kickoff your financial journey.
Cons of a savings account
Less interest earned - You won’t earn as much in interest with a savings account as you would by putting your money in a money market account or an investment account. However, using a high-yield savings account could help mitigate this somewhat.
Limitations and requirements - Savings accounts are also subject to Federal Reserve Reg D requirements. This could be a limitation, depending on how you plan to use your savings account.
Money market account vs savings — which is right for your goals?
When it comes to a money market account vs a saving account, there are pros and cons to weigh for both. While each person's situation is unique, the decision would ultimately come down to your money personality and financial goals.
If you can control your spending and would like to have some money set aside in reserves, consider using a money market account. You'll earn more interest than you would by keeping cash in a checking or savings account. Staying on top of your budgeting can help prevent an account overdraft and ensure you maintain your minimum required account balance.
If you would like to keep your money tucked away specifically for an emergency, or you cannot meet the high balance requirements associated with a money market account, you might consider a traditional savings account instead. Hopefully, you won't need to touch the funds in your savings account often, which means you'll earn more in interest than you would leaving that cash in a checking account. Your money will be safe, and you'll have relatively quick access to it.
While there are other options for saving and earning interest that may provide higher returns, such as investing and CDs, those have their own downsides to consider. If you put the money in an investment account, you are subject to market fluctuations. If you put the money in a certificate of deposit, your money is tied up for a certain period of time. So, while you may earn less in interest, savings accounts and MMAs allow your money to grow while maintaining liquidity and access to your cash.
Start your financial journey by saving money
If you are starting to save for the first time, you might have a lot of questions about where to begin. Two of the safest bets are money market accounts and savings accounts. Though they both have their pros and cons, neither is a bad option to store some excess cash.
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