Banks and credit unions offer several options for saving, including ones that give you immediate access to your funds while paying you interest. For many savers, parking money in a savings account or money market account (MMA) make the most sense.
Find out more about some of the key characteristics of both accounts, and why you might choose a money market account over savings account or vice versa.
Key Takeaways
- Savings and money market accounts are similar—both are deposit accounts that pay interest.
- A savings account is often used to put cash for a short time for short-term needs, but it provides a moderate rate of interest.
- Banks use funds from savings accounts to lend to other consumers via car loans, lines of credit, and credit cards.
- Money market accounts pay a slightly higher interest rate than traditional savings accounts because banks invest in short-term, highly liquid, low-risk assets with the funds.
- Many money market accounts come with minimum balance requirements.
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Savings Accounts vs. Money Market Accounts
Most banks—both traditional brick and mortar and online institutions—offer both savings accounts and money market accounts to their customers. At first glance, these two accounts are similar—both are deposit accounts that pay interest. They are also protected by the Federal Deposit Insurance Corp. (FDIC).
Because the point of these accounts is to save rather than to use the funds for everyday banking, account holders may be limited in the number of withdrawals they can make per month under federal regulations.
Before April 24, 2020, as stipulated by the Federal Reserve'sRegulation D, savings deposit account holders were restricted to six withdrawals or transfers per month. If more than six withdrawals were made, an account could be charged a penalty. This limitation has been removed, but some banks may still place limits on withdrawals.
Savings Accounts Explained
Banks offer savings accounts to their customers as a complement to their checking accounts. It is a good place for people to put their cash for a short period of time for short-term needs such as home renovations, vacations, cars, or emergencies like medical or dental bills.
Banks make building a savings account balance fairly easy. The account can be added to a debit card to make deposits as well as withdrawals, transfers through online banking, and wire payments directly into the account from other institutions. They can also be easily liquidated, providing consumers with ready access to funds.
A savings account provides a fairly low rate of interest income. According to the FDIC, the average national rate of interest for a savings account with a $2,500 balance as of May 15, 2023, was 0.40%.
Savings accounts offer lower interest rates than money market accounts and other investments because financial institutionsare limited in what they can do with the funds. Banks generally lend this money to others for car loans, lines of credit, and credit cards so the banks can make money on the interest they charge.
Money Market Accounts Explained
Money market accounts, on the other hand, are not as common as traditional savings accounts. They are sometimes referred to as money market deposit accounts. They may have some features of both a checking and savings account. Account holders may be able to write checks and do debit card transactions with certain money market accounts.
Money market accounts have a savings account-like feature, where account holders collect interest on the balance they hold at the end of each month.
Most money market accounts tend to pay a slightly higher interest rate than a traditional savings account, which can make them more attractive for depositors.
As of May 15, 2023, the FDIC reported the average interest rate for a money market account was 0.59% for balances that were averaged between $10,000 and $100,000 products.
Banks are able to invest the money account holders deposit into money market accounts in short-term, low-risk securities that are highly liquid. These include certificates of deposit (CDs), government bonds, or other similar investments. When these assets mature, they give money market account holders a portion of the interest they receive.
Money market accounts come with minimum balance requirements. Customers who don't meet the required balance may lose out on high interest, or find their account converted to a regular checking or savings account.
And, just like a regular savings account, money market accounts may have restrictions on the number of withdrawal and debit transactions they can make. It's possible to incur a fee if they go above six transactions in a month.
Many people confuse money market accounts withmoney market funds, which are a type of mutual fund.
Money Market Funds
Don't confuse money market deposit accounts with money market funds. These are also called money market mutual funds. They aren't deposit accounts, but are offered by investment firms.
Investors can buy and sell shares in these funds, which invest in highly liquid assets such as cash and equivalents, and high-rated debt-based assets that mature in less than 13 months. They aren't protectedby the FDIC and are different in other ways from traditional demand deposit, checking, and savings accounts.
What Are the Advantages of Using a Money Market Account Over a Regular Savings Account?
Money market accounts can offer you immediate access to your funds, at almost any time you may need the money. MMAs often offer the ability to write checks or access cash via debit card. And typically you can withdraw without paying a fee, as you might with a certificate of deposit (CD).
What Are Some Downsides of a Money Market Account?
One of the biggest disadvantages of a money market account is thatsome financial institutions may cap how many convenient withdrawals you can make each month. The Federal Reserve once limited consumers to six per month, though this rule was phased out in 2020. Also, a higher balance will be required to earn a better interest rate in these accounts.
Is It Risky To Have a Money Market Account?
Money market accounts are considered safe. The FDIC insures these products for up to $250,000 per depositor, per account ownership category. At credit unions, money market accounts receive the same level of protection from the National Credit Union Administration (NCUA).
The Bottom Line
Some people choosemoney market accountsover savings accounts because they offerhigher interest rates. While the difference in earned interest can be small, itmight be enough to offset possible liquidity constraints posed by money market accounts, if you're are unlikely to need quick access to your cash.
I'm an experienced financial expert with a deep understanding of banking products and services. Over the years, I've closely followed the intricacies of savings accounts, money market accounts, and various investment vehicles. My expertise extends to the mechanics of interest rates, deposit regulations, and the nuances of financial instruments offered by both traditional and online institutions.
Now, let's delve into the key concepts presented in the article:
1. Savings Accounts:
- Purpose: Savings accounts are designed for customers to park cash for short-term needs such as home renovations, vacations, emergencies, or other immediate financial goals.
- Interest Rates: They offer a moderate rate of interest, typically lower than money market accounts and other investments.
- Access to Funds: Easily accessible through various channels, including debit card transactions, online banking transfers, and wire payments.
- Use of Funds: Banks use the funds from savings accounts to lend to other consumers for car loans, lines of credit, and credit cards.
2. Money Market Accounts (MMAs):
- Features: MMAs, also known as money market deposit accounts, combine features of both checking and savings accounts. Some may allow check writing and debit card transactions.
- Interest Rates: Tend to pay a slightly higher interest rate than traditional savings accounts due to investments in short-term, low-risk, highly liquid assets like CDs and government bonds.
- Minimum Balance Requirements: Many MMAs come with minimum balance requirements, and failing to meet them might result in a conversion to a regular checking or savings account.
- Withdrawal Limits: Similar to savings accounts, there may be restrictions on the number of withdrawals and debit transactions, with potential fees for exceeding the limit.
3. Money Market Funds:
- Differentiation: Money market accounts should not be confused with money market funds. The latter are investment products offered by investment firms, involving buying and selling shares in funds that invest in highly liquid and high-rated debt-based assets.
4. Regulation Changes (Regulation D):
- Withdrawal Limits: Before April 24, 2020, federal regulations (Regulation D) limited savings account holders to six withdrawals or transfers per month. This restriction has been removed, but some banks may still impose limits.
5. Interest Rates Statistics (as of May 15, 2023):
- Savings Account: The average national interest rate for a savings account with a $2,500 balance was 0.40%.
- Money Market Account: The average interest rate for a money market account was 0.59% for balances averaged between $10,000 and $100,000.
6. Risks and Protections:
- Safety: Both savings and money market accounts are considered safe, with FDIC insurance covering deposits up to $250,000 per depositor, per account ownership category.
7. Decision Factors:
- Advantages of MMAs: Immediate access to funds, check-writing capabilities, and potentially higher interest rates.
- Disadvantages of MMAs: Possible withdrawal limits, higher balance requirements for better interest rates.
In conclusion, the choice between a savings account and a money market account depends on individual financial goals, liquidity needs, and the importance of interest rates. Both options provide safety through FDIC insurance, and understanding their features can empower individuals to make informed decisions based on their unique circ*mstances.
