Savings vs. Money Market accounts: which is the right one for you? In 2018, Americans managed to put away approximately $1 trillion in personal savings.
That was about 6.2% of their disposable income. So if you took home $50,000 after taxes last year, you likely stashed away around $3,100. Saving money is not easy with all the financial demands of daily life. So it is important you make every cent count. Which begs the questions: what type of account can help you make the most of the money you save?
Savings vs. money market account: which is better?
Both savings and money market accounts allow you to put your money away and earn interest on it so how do you choose between the two? The decision will primarily depend on four factors:
- The annual percentage yield (APY) which shows you how much your money can earn in a year.
- The amount you have to deposit at the time you open the account.
- The amount you plan to keep in the account on a monthly basis.
- How often you want to withdraw or transfer money out of the account.
Generally, savings accounts offer a lower APY but also require a lower minimum deposit and lower monthly balance amount. This can be helpful if you don’t have much money to put into the account at first.
On the other hand, money market accounts typically require a higher initial deposit and monthly balance amount but offer higher APYs as the reward.
That being said, there are exceptions and other factors to consider. In this article, we’ll take a closer look at both options to help you decide which is best for you.
With that in mind, let’s take a closer look at both account types.
Savings vs. Money Market: Savings Account
A savings account is an interest-bearing financial account designed to help the account holder save money. You deposit money into the account and leave it there so it can grow slowly over time. The interest paid is normally based on the institution’s lending activities.
Withdrawing money from a savings account is primarily done via electronic transfers. Considering the six-transaction limit, accessing money in a savings account can be difficult. However, this discourages spending which can be beneficial if you have trouble saving.
How about earnings? According to the FDIC, the national interest rate for savings accounts is 0.09% no matter the deposit amount (above, equal to, or below $100,000).
However, some online savings accounts are offering much higher interest yields. According to CNBC, VIO Bank offers up to 2.1%, Alliant offers up to 1.8%, Barclays offers up to 1.85%, and Synchrony offers up to 1.85%. While the nationwide average APY is low, these new offers will likely shift the average in upcoming years.
Compare the APY from leading savings accounts below.
Lastly, savings accounts often don’t have minimum balance requirements. If they do, they are typically lower than money market requirements.
Here is a list of the benefits and the drawbacks to consider.
- Minimum deposit and ongoing balance requirements are often lower than money market accounts.
- Funds in the account are less accessible which can make it easier to save.
- Online banks offer high APYs.
- FDIC and NCUA-insured accounts available.
- Negative consequences may apply if you need to transfer money out more than six times per statement cycle.
- ATM cards are typically not provided which can be inconvenient.
- Interest yields are lower on average than rates for money market accounts.
Why choose a savings account?
Savings accounts are often easier to open because they are less likely to have a minimum deposit amount. They may also help you to spend less because the methods of transferring the money out of the account are often limited.
The potential drawbacks include a lower interest yield and less accessibility to your money.
Next, let’s look at money market accounts.
Savings vs. Money Market: Money Market Accounts
A money market account is an interest-bearing account that has features of both a checking and a savings account.
Like a savings account, you earn interest on your account balance and are limited to six outgoing transactions per month. However, like a checking account, you can access your money using an ATM card and checks.
Unlike either account, the interest earned in money market accounts comes from trading activity on the financial markets.
How much can you make on your money?
According to the FDIC, the national interest rate for money market accounts with deposits under $100,000 is 0.15%. For those with deposits equal to or higher than $100,000, the average interest rate is 0.23%.
However, like savings accounts, online money market accounts are available that offer even higher interest yields. See the money market rates from top lenders below.
Money market accounts typically have higher minimum deposit amount requirements than savings accounts. Further, you often have to maintain a certain amount in the account over time.
In summary, the average APY is higher than with a savings account. Plus, the ATM card allows for easier access to your money. However, there are often higher minimum deposit and account balance requirements and a tiered system which requires higher balances for better APYs.
Here is a list of the benefits and the drawbacks to consider.
- Higher average interest rates than savings accounts.
- Easier access to funds with ATM card.
- Low-risk investment.
- FDIC or NCUSIF-insured available.
- Higher minimum deposit and balance requirements are common.
- Higher APYs require higher account balances.
- Fees often apply if you fall below your minimum balance requirement.
- Limited to six outgoing withdrawals according to Regulation D.
Why choose a money market account?
A money market can potentially help you earn more on your savings but the catch is you must have a higher amount to deposit. If you do, a money market account will likely be a good fit.
However, be sure to consider the accessibility factor. Consider if an ATM card will help or hurt your efforts to save money.
What to look for in a savings vs. money market account
Whether you decide on a savings account or money market account, there are some common factors you should look for in the offerings from financial institutions.
- Low fees: Banks and credit unions may charge a variety of fees for opening the account, maintenance, falling below the balance requirements, and processing too many outgoing transactions. Look for minimal fees.
- High APY: The APY your account has will determine how much you make on your money. The higher, the better.
- Minimum deposit: Banks may set a minimum amount that you have to deposit in the account to open it and/or get the interest rate yield. Look for the minimum amount that suits your needs.
- Monthly minimum balance: Look for an account with a minimum balance requirement that suits your needs. Some don’t have one while others do.
- Online access: Managing your savings account online adds a level of convenience. Different banks vary in the level of online access they offer so consider it when making your decision. Online accounts also often offer notably higher APYs.
- Member FDIC or NCUA: Institutions that are insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) protect up to $250,000 of your deposits if the bank or credit union fails. Ensure the institution you choose is covered.
- Outgoing transaction methods: Check the methods by which you can get money out of the account. Some accounts only allow for electronic transfers while others may provide you with check-writing abilities or an ATM debit card. The best fit will depend on your preferences.
After considering all of these factors, find the account that provides the best combination of benefits.
The six-transaction limit: savings vs. money market
If you’re considering a savings vs. money market account, you should know about the six-transaction limit. This limit is included in the Reserve Requirements for Depository Institutions (12 C.F.R. 204, Regulation D).
What is the six-transaction limit
It limits money market accounts and savings accounts to six withdrawals or outgoing transfers per month. This helps to ensure that banks have the necessary reserves on hand when they need them. It also encourages account holders to use the accounts as they are intended; to save money.
Limited transaction types
The transaction methods which are restricted by this regulation include:
- Online transfers to other accounts (at the same institution or another).
- Overdraft transfers (such as from a checking account).
- Transfers initiated by debit card or check.
- Bill payments or other recurring transfers that are pre-authorized.
- Transfers initiated over the phone.
The six-transaction limit does not apply to the following:
- Withdrawals or transfers made at the ATM.
- Transactions initiated in-person at the bank.
- Withdrawals made by phone when the check is sent by mail to the depositor.
Note that some institutions will place their own limits on these latter transaction types.
How it impacts saving and money market accounts
The consequences of exceeding six withdrawals will vary by financial institution but may include fees, account closure, or a forced account conversion.
When comparing savings and money market accounts, keep in mind that both are subject to these limits. However, money market accounts usually offer debit cards which enable you to withdraw or transfer as much as you’d like through the ATM. Savings account typically do not provide debit cards which limits access to the funds in the account.
FAQ on Savings vs. Money Market
What is money market account?
A money market account (MMA) or money market deposit account (MMDA) is a deposit account that pays interest based on current interest rates in the money markets.
Can you lose your money in a money market account?
High-risk money market fund holdings can lose value in volatile market conditions or if interest rates drop, but they can produce more income. Because they are considered investments and not deposits, money market funds are not insured against loss by the FDIC.
What are the advantages of a money market account?
Money market accounts pay higher interest rates than other types of bank accounts, including passbook savings accounts and regular savings accounts, provided they maintain the minimum balance.
Do you pay taxes on money market accounts?
Money market deposit accounts are a type of savings account offered by banks and credit unions. The Internal Revenue Service requires account holders to pay tax on interest earned on money market accounts and other types of interest-paying deposit accounts.
Why choose savings account?
Savings accounts are often easier to open because they are less likely to have a minimum deposit amount. They may also help you to spend less because the methods of transferring the money out of the account are often limited. The potential drawbacks include a lower interest yield and less accessibility to your money.
Savings vs. Money Market: Find the best fit for you
The decision between a money market account and a savings account used to be cut and dry. However, now the line between the two is a little bit fuzzier.
Online accounts have caused both to offer significantly higher APYs. Further, some institutions are adding new features to their savings accounts such as tiered APYs and debit cards. Being so, it’s good to shop around for both types to see which will offer you the most value.
Ready to shop around? Compare money market and savings accounts easily on SuperMoney’s review pages. You’ll find leading institutions side-by-side with stats like APYs, minimum balance requirements, and monthly fees all on one page.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.