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Money market accounts and savings accounts are both low-risk ways to save money for the near future. Money market accounts typically offer a few extra features and a higher interest rate, but come with more restrictions. Which one is better? That will depend on how much money you have available and how you intend to use it. Here’s a closer look at money market accounts vs. savings accounts, how each account works, and how they compare to other savings vehicles (like CDs and money market funds).
What Are Money Market Accounts?
Money market accounts are interest-bearing accounts held at a bank or credit union. Like traditional savings accounts, they typically come with limits on the number of withdrawals you can make per month. (While the federal rule limiting you to six savings-account withdrawals per month is no longer in force, many banks still impose these limitations.)The money you put in a money market account is safe. These accounts are insured by the Federal Deposit Insurance Corporation (FDIC) if they are at a bank or by the National Credit Union Administration (NCUA) if they are at a credit union.While the interest rate – and the associated annual percentage yield or APY – on money market accounts is relatively low, it may be higher than the rate offered by a standard savings account. Money market accounts also offer some of the benefits that normally only come with having a checking account, including the ability to write checks and use of a debit card for withdrawals and purchases, making them a kind of hybrid account.Recommended: What Is a Business Money Market Account?
What Are Savings Accounts?
Savings accounts are interest-bearing accounts offered by traditional banks, online banks, and credit unions. Like other savings vehicles, you are often limited to six withdrawals per month. As a result, savings accounts are not ideal for everyday spending (that’s what checking accounts are for).While minimum amounts to open an account vary by bank and credit union, you can typically open a savings account with as little as $1 — though some high-yield accounts may require higher minimum deposits. The cash you stash in a savings account is safe, since these accounts are insured by the FDIC if they are at a bank and by the NCUA if they are at a credit union.At the same time, however, you won’t earn very much. APYs on standard savings accounts are generally low. As a result, they are best for savings goals that are a few months to a year away, such as an emergency savings fund, a downpayment on a home, or a vacation.
Money Market Account vs. Savings Account
Both money market accounts and savings accounts are both good places to store funds for short-term savings goals, like building an emergency fund, buying a car, or paying for a wedding or upcoming vacation. The money earns interest, allowing your savings to grow. At the same time the funds are safe and accessible, so you can easily get your money once you’ve reached your savings goal.Neither type of account is designed for everyday spending, since there are often restrictions on how many transactions you can make per month (which may be six or nine depending on the bank). And, since APYs are relatively low (even with money market accounts), neither type of savings vehicle is considered a good place to grow wealth or keep funds you intend to use for long-term goals like retirement or a child’s college education.Savings and money market accounts also have some a few key differences, however. For one, money market accounts generally earn a higher APY than a regular savings account (though a high-yield savings account can be just as good or better). These accounts are also more likely to require you to maintain a certain minimum balance, making them better for people with larger sums to save.Also, unlike savings accounts, money market accounts will often offer check-writing privileges and debit cards. This makes them a little easier to use when it comes time to spend your savings.In addition, money market accounts may charge fees, such as a fee for going below the account minimum, whereas savings accounts typically have fewer fees and in some cases no fees.
Money Market Account
Standard Savings Account
Safety
Federally insured
Federally insured
Interest
Yes
Yes
Account Minimums
Yes
No
Withdrawal Limits
Yes
Yes
Check Writing
Yes
No
Debit Card
Yes
No
Alternatives to Money Market Accounts and Savings Accounts
Here are two other places where you can stash your savings that may provide higher returns in exchange for more restrictions or risk.
Certificates of Deposit (CD)
A CD is a savings vehicle that ties your money up for a specific period of time. CD terms can range from a few months to five years or longer. Once you open and fund the account, you cannot access your money until the end of CD’s term. If you do, you will typically pay a penalty fee. In return for this loss of flexibility, CDs generally pay a higher interest rate than savings accounts or money market accounts.CDs offer fixed rates that are guaranteed for the term of the CD. This can be a good thing if you lock in a rate and then market rates go down. However, it can be a negative if you lock in a rate and then market rates go up.Recommended: What Is a CD Loan?
Money Market Funds
Though they often get confused, a money market fund is not the same as a money market account. A money market fund is a type of mutual fund that invests in highly liquid vehicles, such as CDs, unsecured short-term corporate debt, repurchase agreements, and US treasuries.Returns are generally higher than savings accounts and money market accounts, but will depend on the market and are not guaranteed. The returns are usually lower than what you might earn on a fund invested in the stock market, but these funds come with lower risk.While they are technically investments, money market funds act more like on-demand cash accounts since the money is easily accessible. These mutual funds may have a minimum initial investment requirement, as well as balance requirements and transaction fees.
Which Is Right for You?
Choosing the right type of account to grow your savings depends on your goals and financial situation. If you don’t have a lot of money to set aside, a savings account may make the most sense since you can find accounts that don’t require a minimum deposit or monthly balance.If you want to earn a higher APY and you can meet a higher account minimum, a money market account may be a good option, since you can still easily access your money and may enjoy the check-writing privileges and debit card.If you know that you won’t need the money for a while, you might consider putting it in a CD if you can find one with a good rate. Just keep in mind that you won't be able to access the money for the term of the CD. If you're interested in the highest possible yield, a money market fund could be a good choice. While there is no federal insurance against loss, risks are minimal and the money remains liquid, meaning you can access it at any time.Also keep in mind that you can have more than one savings vehicle at the same time, and can use these accounts together to work toward your goals and maximize your earnings.
Explore Your Banking Options With Lantern
Understanding the difference between savings accounts and money market accounts can help you make decisions that best fit your banking and financial needs.If you’re interested in finding the best rate for your savings, Lantern by SoFi can help. With our online banking marketplace, it’s easy to compare high-yield savings accounts based on interest rate, fees, and balance minimums. Compare online savings accounts and find the best rate with Lantern today.
Frequently Asked Questions
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About the Author
Caroline Banton
Caroline Banton is a finance and business writer whose work has appeared on sites such as The Huffington Post, Investopedia, The Motley Fool, LendingTree, MSN, and Time. With an MBA from Johns Hopkins University, Caroline has written for fintech companies, acted as a career coach, and ghost-written for prominent thought leaders in the financial industry.
