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Money market vs savings accounts: which one pays a higher interest rate? This is arguably the most common question from consumers who want to place their hard-earned money in a deposit account that is considered less risky than stocks and provides a good level of flexibility and liquidity.

Both accounts offer benefits and drawbacks that you must weigh before making any decision. Furthermore, each bank has their own provisions and restrictions, so it is difficult to make a sweeping generalization that could have determined if one account is better than the other. When it comes to money market vs savings accounts, there is no real one-size-fits-all answer. You have to weigh the pros and cons of a money market vs savings account.

What Is a Money Market Account?

From a consumer’s perspective, a money market account is essentially the same as a savings account with just a few subtle differences. For example, both accounts are FDIC-insured, which means the federal government provides insurance coverage of up to $250,000 per depositor. Consequently, they suit people with a very low appetite for risk and those who need a safe account to place their emergency funds.

In general, money market accounts have restrictions on the number of withdrawals you can make every month. While these limitations depend on bank policies and government regulations, most account holders are limited to six withdrawals per month. As a result, you may want to keep a separate checking account if you frequently write checks.

Another difference between money market vs savings is that the former generally provides a higher interest rate—an average of 1.5 percent or sometimes even 1.9 percent. Savings accounts, meanwhile, are known for their woefully low interest rate of just 1 percent, although a growing number of online banks are now offering up to 1.75 percent annual percentage yield.

Enter your textHowever, the higher interest rate of money market accounts comes with a condition: you are required to maintain a higher balance than savings accounts would normally demand. If you tend to carry a low balance, the money market vs savings account question may be settled.

Meanwhile, some money market accounts allows you to write checks up to three months.

From a consumer’s standpoint, the differences are not too significant between the two accounts. For banks and other financial institutions, though, the money market vs savings account question is more complicated.

When you open a money market account, government regulations dictate that your bank can use your money to invest in treasury notes, municipal bonds, and certificates of deposit. They can also lend your money to borrowers (individuals and business entities) who must repay the loan that comes with an interest rate. here...

What Is a Savings Account?

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In a nutshell, a savings account is an interest-bearing deposit account that is quite similar to a money market account because it also has limitations in the number of withdrawals or transactions you can make each month.

To reiterate, savings accounts generally offer a lower interest rate than money market accounts, so financial experts view them as a poor choice for long-term holdings. But as an account for emergency funds and short-term financial goals, a saving account can serve an indispensable purpose.

Unlike some money market accounts, savings accounts do not allow you to write checks. Nonetheless, they still make your funds readily available and highly liquid, which of course means you can easily overspend them if you lack financial discipline.

Again, for an average consumer, the differences between money market vs savings account are insignificant with the exception of their interest rates. But from a bank or financial institution’s perspective, they have key differences in terms of how they are being used.

According to government regulations, banks can only use the money in your savings account in their lending activities. They can loan a certain amount to borrowers who must repay it at an agreed-upon period and interest rate. Meanwhile, banks cannot use these funds to invest in treasury notes, municipal bonds, or certificates of deposit.

Savings accounts held at banks or other financial institutions have a fixed interest rate, while money market accounts have rates that often fluctuate regularly depending on the type of government-guaranteed investments available at the time.

While it is true that savings accounts traditionally offer lower rates than money market accounts, some large banks offer up to 2.5 annual percentage yield. Some of them only require a minimum deposit of $100.

How Do Money Market vs Savings Accounts Differ?

Ho recap, these are the key differences between the two interest-bearing deposit accounts held at banks and other financial institutions:

Money Market Accounts

Generally offer higher interest rates than savings accounts

  • Rates often go up and down depending on the available government-guaranteed investments
  • Have a higher minimum deposit and maintaining balance
  • Some accounts allow customers to write checks
  • There are fewer restrictions on how the banks can use the money

Savings Accounts

  • Offer lower interest rates than money market accounts
  • The interest rate is generally fixed
  • Require lower minimum deposit and maintaining balance
  • Do not allow account holders to write checks
  • Banks can’t use the money to invest in bonds and treasuries
  • Banks can only use the deposited money in their lending activities

Deciding Between Money Market vs Savings Accounts

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While they are essentially the same, most consumers might find a better deal with money market accounts because of their slightly higher interest rate. Nonetheless, this is not a hard and fast rule due to the growing number of online savings accounts that are offering competitive rates.

However, most local brick-and-mortar savings are still known for their notoriously low interest rates.

Money market accounts are also a better option if you write checks occasionally. One example where they are particularly ideal is when an account holder is saving for a home or car and needs to write a few checks per month to cover their mortgage or loan without having to transfer money from another account.

But savings accounts remain a better choice if you often find yourself struggling to keep your finances afloat—i.e., you can’t maintain the higher balance generally required by money market accounts. Many accounts to charge a penalty fee (usually $8-$10 per month) if your balance is too low.

Instead of limiting yourself to one account, why not use multiple accounts for different purposes? This is particularly ideal if you have a large amount of money as FDIC insurance coverage only applies to deposits of up to $250,000 per account holder.

In a nutshell, money market and savings account are a good place to keep your emergency funds you need for your short-term financial goals because of the high liquidity they offer. The general rule of thumb is to have enough funds to cover at least 3-6 months’ worth of bills, although more conservative financial gurus recommend at least 6-12 months’ worth of one’s salary.

If you have enough buffer or emergency funds, you may choose to invest in higher interest-bearing accounts or even consider investing in stocks, bonds, mutual funds, etc.

Conclusion

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The ideal deposit account boils down to its purpose and your financial goals and lifestyle. In general, the money market account is a better option because it offers you more flexibility—i.e., you can write checks, withdraw money, and enjoy a high level of liquidity.

Furthermore, money market accounts generally provide higher interest rates than savings accounts, although there are some exceptions to the rule. Just to be on the safe side, choose high-yield accounts that are FDIC-insured and can protect you against inflation to some extent.

To reiterate, deposit accounts, whether money market or savings, are not ideal for long-term holding periods. If your goal is to grow your money, financial experts suggest that you put your money in government-guaranteed investments (treasuries and municipal bonds), equities or stock market, index funds, and/or mutual funds.

Both money market and savings accounts facilitate saving and allow fast and easy access to your funds. Consequently, these are the perfect accounts for your emergency funds as opposed to investment vehicles that are more difficult to cash.

Whether you decide the question of money market vs savings account one way or the other, here are some of the key factors to keep in mind:

  • Interest rate
  • Minimum balance requirements (and penalties in the event that you’re not able to meet them)
  • Fee structures
  • Accessibility of your account
  • Insurance policies
  • Ease of use
  • Deposit options
  • Must be FDIC-insured

Once you’ve looked over these different factors, you’ll be able to determine the question of money market vs savings account.


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