How’s a Money Market Account Different Than a Traditional Savings Account?
If you’ve been putting your savings front and center, then chances are you’ve encountered two popular options: money market accounts and traditional savings accounts. Both offer pros and cons, which you should carefully consider along with your overall savings goals.
This guide defines both types of accounts and explains the relative pros and cons. Let’s dig into the details so you can choose the option that best matches your goals.
What’s a Money Market Account?
A money market account offers fixed returns in the form of interest on the holder’s deposited principal. Beyond traditional banks and credit unions, online banks and fintech companies also have money market accounts.
Institutions use these funds to invest in highly liquid, short-term debt instruments such as commercial paper securities and overnight reserves. These investment vehicles trade between financial institutions in large volumes, and they pose very low risk to the investor.
While some money market transactions are subject to price volatility and fluctuations, most have such short maturity timelines. So, market forces only impact them in exceptional and extremely rare circumstances.
Money market accounts pay regular interest rates on a schedule set by the institution. Most post interest credits to the account on a monthly basis. As interest payments grow the account’s balance, account holders earn more money over time as long as they leave their savings deposited.
The funds in money market accounts are accessible to the account holder at all times. Financial institutions issue debit cards for these accounts. Additionally, investors can use them to write checks and complete electronic transactions.
However, federal regulations limit the number of authorized monthly transactions. Plus, institutions may impose additional restrictions on money market account holders. These policies can be an advantage for diligent savers since they disincentivize unnecessary withdrawals and spending.
Types of Money Market Accounts
Financial institutions offer two main account types that directly invest in money markets: money market accounts and money market funds. They share many similarities but also differ in important ways. So, it’s crucial for investors to understand that the two terms aren’t interchangeable.
Money market accounts are readily available through all types of retail financial institutions. Interest rates vary, and they usually rise alongside inflation, or when central banking institutions raise them. In many cases, the institution hosting the account requires depositors to commit a minimum amount of money. Plus, account holders often need to maintain a minimum monthly balance or pay a penalty.
They’re subject to Federal Reserve Regulation D requirements, which places a limit of six transactions per month on these accounts. And money market accounts are backed by the Federal Deposit Insurance Corporation (FDIC). So, balances of up to $250,000 are guaranteed if the account is hosted at an FDIC-registered institution.
Money market funds also invest in money markets. But they have fewer constraints and a much larger pool of money drawn from many individuals and institutions. They usually pay slightly higher interest rates. But they aren’t insured by the FDIC or otherwise regulated by federal deposit protections.
Investors can access the funds whenever they like, and money market mutual funds aren’t subject to monthly transaction limits. However, some financial institutions don’t offer debit cards for money market mutual funds. Similar restrictions on electronic transactions may apply.
Institutions attach variable terms and conditions to these money market funds, so they could involve additional restrictions. So, always perform thorough due diligence when considering these options.
Money market funds are usually available through brokerages, investment banks, and mutual fund companies. While some traditional and online retail institutions also support them, they aren’t universally available.
Money Market Account vs. Money Market Fund
The following chart offers an at-a-glance comparison of applicable terms and features:
What’s a Savings Account?
A traditional savings account pays interest at fixed rates. They are highly liquid, and depositors have access to the funds at all times. While money market accounts are reinvested into money markets or other financial exchanges, savings accounts aren’t. So, savings accounts are even safer but offer lower returns.
In some cases, savings accounts pay variable interest rates that fluctuate according to market forces or the amount of money in the account. In other cases, providers may offer promotional fixed interest rates that go down after an introductory period or revert to variable rates once the introductory period expires. Additionally, some institutions reserve their best rates for customers who maintain relatively large balances.
Like money market accounts, most savings accounts are subject to Federal Reserve Regulation D standards. This means that account holders are limited to six transactions per month. However, in April 2020, the U.S. Federal Reserve lifted this requirement for savings accounts only. There hasn’t been guidance on when this interim policy will change.
Types of Savings Accounts
Some banks only offer traditional savings accounts, while others support more options. For instance, there are high-interest savings accounts and specialized accounts.
High-interest savings accounts bear more interest than traditional savings accounts. Though not usually as much interest as money market accounts. In exchange, there may be additional limits like minimum requirements on initial deposits and monthly balances. High-interest savings accounts are also known as high-yield savings accounts.
Some institutions offer specialized accounts that help customers save for specific objectives. To do so, the institution tailors the terms, conditions, and interest yields accordingly. Examples include children’s savings accounts, 529 savings accounts for college, individual retirement accounts, and health savings accounts.
Pros and Cons of Money Market Accounts vs. Savings Accounts
Note that for the purposes of this comparison, we’re dealing specifically with money market accounts, not money market mutual funds.
Which Account Is Right for You?
Everyone’s financial situation is different, so we can’t recommend one over the other. That said, there are general circumstances in which savings accounts may be more appealing and others in which money market accounts are more appealing.
A savings account may be a good fit if you:
- Are just beginning to save
- Are starting with a relatively small amount of money
- Want to maintain all your accounts with one institution
- Want to optimize appealing interest rates with minimum capital commitment
On the other hand, a money market account may be a good fit if you:
- Want to match the highest possible interest yields with the lowest amount of risk
- Can meet minimum initial deposits and monthly balance requirements
- Only require periodic access to your money
- Plan to leave your money deposited for a longer period of time
The Bottom Line
Regardless of which option you choose, be sure to spend time shopping around. Fintech advancements have proven to be a game-changer in the banking industry. As a result, online banks often beat traditional banks in terms of interest rates and account terms.