I get it — the idea of saving isn’t the most exciting thing in the world.
But saving is important. It’s the difference between funding an amazing vacation with money you have and putting it on a credit card… to be paid off eventually.
It’s the difference between paying for an unexpected car repair, no problem, and begging your dad for another loan.
Prioritizing saving as soon as you can is critical to a healthy financial life. But with your checking account, your new workplace retirement account, and that humongous jar of coins you have stashed in your closet, you’re likely wondering where the best place is to put your savings.
Spoiler: it’s not the jumbo coin jar.
You probably have some sort of traditional savings account, which can be a great option for parking these funds. But savings accounts aren’t the only place to stash money. In fact, depending on your goals and preferences, there may be a better option out there for you.
In this article, we dive into money market versus savings accounts — what they are, how they work, and which one will work best for you.
Money Market vs. Savings Accounts at a Glance
To be clear, money market accounts and savings accounts are both safe, secure places for you to keep your money. Neither is a substitute for a checking account — these accounts are for saving, not spending — but like a checking account, you can open one at a bank or credit union.
Here are the basics of each:
- A savings account is a deposit account that earns a small amount of interest and can link to your checking account.
- A money market account is a deposit account that is similar to a savings account — but also has some typical features of a checking account.
- Money market accounts and savings accounts can serve similar purposes, like holding emergency and short-term savings.
- Money market accounts and savings accounts are both generally low-risk places to keep your money, but they limit the number of transactions you can make each month.
- Money market accounts usually have a higher savings rate (APY) and minimum balance requirement than savings accounts.
What is a Money Market Account?
If a checking account and a savings account fell in love and had a baby , it’d be a money market account. In other words, a money market account is like a hybrid between a checking and savings account.
Money market accounts earn interest and may be limited to six withdrawals a month — just like savings accounts — but they also come with a debit card and checks just like a checking account.
Money Market Accounts: Pros & Cons
Pro: Higher Interest
Money market accounts usually have a higher interest rate than traditional savings and checking accounts.
However, you’ll want to do some research if you’re looking for the best interest rates, because money market interest rates might not be as high as those of some other deposit accounts. But in general, you can expect to earn more than you would with a traditional savings account.
Money market accounts are more accessible, or liquid, than a traditional savings account. This is because some money market accounts come with checks and a debit card — two features typically reserved just for checking accounts.
Accessibility can be useful when you have an emergency and need to access your savings immediately. (But don’t be tempted to use your savings as your spending money just because it’s easy).
Money market accounts are considered low-risk accounts. They’re insured up to $250,000 (by the FDIC at banks and by the NCUA at credit unions). This means your money is always safe, and you’d get it back if the bank were to fail for some reason.
Con: High Minimum Balance
Money market accounts tend to have higher minimum balance requirements than savings accounts — some as high as several thousand dollars. You may need to meet this minimum to open an account or earn the advertised APY.
This should be a primary consideration when thinking about opening a money market account. There’s less reason to open one if you don’t get the benefit of a decent interest rate.
Con: Limited Withdrawals
Part of the reason you get a better interest rate on your money market account is because historically, there’s been a limit on the number of withdrawals you can make each month. Regulation D, a Federal Reserve ruling, limited the number of withdrawals from both savings and money market accounts to six per month — until 2020, that is.
Even though this regulation isn’t in place anymore, many banks and credit unions still enforce the limit. Depending on your bank, there may be ways to get around the limit using certain kinds of transactions (like those with an ATM or bank teller).
When Should I Use a Money Market Account?
You should consider a money market account if you want to earn interest on your savings and be able to access it using a debit card or checks if you need to. You also need to feel confident you can meet any minimum balance requirements your account may have.
You should also think about how soon you’ll need to access your money. Money market accounts are ideal for short and medium-term goals, like sinking funds or an emergency fund. But if you’re trying to save for retirement, you’re better off investing that money.
Money Market Accounts vs. CDs
If you’ve spent any time researching different options for savings vehicles, you’ve probably heard of CDs. A CD, also known as a certificate of deposit, can serve a similar purpose as a money market account. But it has some important distinctions.
Most importantly, CDs are less liquid. When you deposit money into a CD, you commit to not touching it for a certain period of time. In exchange, you typically receive a higher interest rate.
CDs work well when you know you won’t need that money for a while. They aren’t a wise choice for shorter-term savings and your emergency fund because they “lock up” your money for a period of time.
Money Market Accounts vs. Money Market Mutual Funds
There’s an important difference between money market accounts versus money market mutual funds, so don’t confuse them.
Money market mutual funds usually have higher returns — that’s because they’re considered investments. As far as investments go, money market mutual funds are low-risk, but they don’t have FDIC insurance like a money market account does.
Rather than opening an account at a bank or credit union, you open a money market fund at a brokerage or investment firm.
What is a Savings Account?
A savings account is a type of deposit account similar to a money market account. Typically, a bank or credit union will pay interest on your savings account and limit the number of withdrawals you can make each month. You can link your savings to a checking account and make transfers between the two.
Traditional savings accounts don’t tend to earn much in terms of interest. However, online banks have become more and more popular because of their ability to offer higher interest rates on savings accounts. This is because of their lower overhead cost due to not having brick-and-mortar locations.
Savings Accounts: Pros & Cons
Savings accounts — whether at a traditional bank, credit union, or online bank — are insured and secure. They provide the peace of mind you want for things like your emergency fund or shorter-term savings goals.
Savings accounts are a good place for funds you want to access in the short- and medium-term. Again, your bank will probably limit the number of withdrawals and transfers you can make each month. But since your savings is just that — savings — you shouldn’t need to access it too often, anyway.
Pro: Lower Minimum Balance Requirements
Savings accounts may have lower minimum requirements than money market accounts, in part because they offer lower interest rates. Most online banks let you open an account with as little as $0 — compared to a few thousand for many money market accounts.
Con: No Checks or Debit Card
Unlike a money market account, savings accounts don’t come with checks or debit cards. This can add an extra step when it’s time to access your cash. (You may need to transfer it to your checking account — then use your debit card, or make a withdrawal at a bank).
Con: Typically Lower Interest Rates
Savings accounts generally have lower interest rates than money market accounts. With many traditional savings accounts, the interest you earn is almost negligible.
When Should I Use a Savings Account?
A savings account might be a good idea when you want a secure place to save your cash but don’t have enough to cover a money market account’s minimum balance requirement.
Short-term savings goals, like building an emergency fund or saving for a vacation, are often good reasons to use a savings account.
If you decide to use a savings account, go with a high-yield account from an online bank. They usually have lower fees and higher interest rates.
Money Market or Savings Account — Which is Best for You?
In general, both money market and savings accounts are good for short and medium-term savings. Money market accounts usually earn more interest and have more flexibility — plus they have some of the same convenient features as a checking account.
However, a savings account makes more sense if you can’t meet the minimum balance required to earn a decent interest rate with a money market account.
If you’re someone who struggles to leave your savings alone, a savings account might be better for you. Since the cash in a savings account isn’t accessible with checks and a debit card, it’s easier to leave it untouched.
Savings and money market accounts are both good options for holding your savings, but a money market account gives you more ways to access your money and may have higher minimum balance requirements.
Whether you’re leaning toward opening a savings account or putting your cash in a money market account, take time to shop around so you know what to expect when it comes to the account’s rates, fees, and limits.