Banks and credit unions offer several options for saving your money. A traditional savings account provides access to your funds while paying you interest. However, a money market account (MMA)—a hybrid between a checking and savings account—also pays interest, offers check-writing, and access to funds via a debit card. Discover the advantages and disadvantages of a money market account and savings account.
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 interest rate.
- Banks use funds from savings accounts to lend to other consumers via car loans, lines of credit, and credit cards.
- Money market accounts may pay a 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 savings accounts and money market accounts. At first glance, these two accounts are similar—both are deposit accounts that pay interest.
Money market accounts can pay higher interest than traditional savings accounts, but money markets may also come with a higher minimum balance requirement and opening deposit amount.
Monthly fees, balance requirements, and interest paid vary by bank. Be sure to research before opening a money market or savings account since some banks offer interest on savings accounts that rival the rates of money market accounts.
Federally Insured
Your deposits in money market accounts and savings accounts are federally insured up to certain limits, depending on the ownership category. The Federal Deposit Insurance Corp. (FDIC) provides deposit insurance for financial institutions and banks, while the National Credit Union Administration (NCUA) provides insurance for credit unions.
Withdrawal Limits
Account holders may face limits on the number of withdrawals each month from a money market and savings account. The limits were established under federal regulations since these accounts were designed for saving rather than everyday banking.
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. The withdrawal limitation has been removed, but some banks may still place limits on withdrawals.
| Savings Accounts vs. Money Market Accounts | ||
|---|---|---|
| Savings Account | Money Market Account | |
| Check writing | No | Yes, but limited |
| ATM card withdrawals | Yes | Yes |
| Debit card access | No | Yes, but limited |
| Pays interest | Yes | Yes |
| Federally insured | Yes | Yes |
| Withdrawal limits | 6 per month possible, varies per bank | 6 per month likely, varies per bank |
| Initial deposit amount | Low | Higher |
| Minimum balance requirement | Low | Higher |
| Monthly fee | Lower, waived if min. balance met | Higher, waived if min. balance met |
Savings Accounts Explained
Banks offer savings accounts to their customers as a complement to their checking accounts. Savings accounts can be a good place for people to put their cash for short-term needs such as home renovations, vacations, cars, or emergencies like medical or dental bills.
Access to Funds
Banks make building a savings account balance fairly easy. The account can be added to a debit card to make deposits and withdrawals, transfers through online banking, and wire payments directly into the account from other institutions. Customers can access and withdraw funds easily, providing consumers with ready access to cash.
Savings Account Interest
A savings account may provide a low interest rate on deposits, although some banks offer higher rates than others. According to the FDIC, the average national rate of interest for a savings account with a $2,500 balance as of July 15, 2024, was 0.45%.
Savings accounts may 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 are less common than traditional savings accounts and are sometimes called money market deposit accounts.
Hybrid Accounts
A money market account is a hybrid since it offers the features of a checking and savings account. Certain money market accounts provide check-writing and debit card transactions. 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.
Money market accounts may offer a slightly higher interest rate than a traditional savings account. Be sure to research the various rates banks and credit unions offer.
Money Market Interest
As of July 15, 2024, the FDIC reported the average interest rate for a money market account was 0.66% for averaged balances between $10,000 and $100,000 products.
Banks can invest the money account holders deposit into money market accounts in highly liquid, short-term, low-risk securities. 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 often come with a tiered balance option, meaning the more money deposited, the higher the interest rate on deposits.
Minimum Balance and Restrictions
Money market accounts come with minimum balance requirements. Customers who don't meet the required balance may lose out on interest or find their account converted to a regular checking or savings account.
Also, money market accounts may restrict the number of withdrawal and debit transactions similar to a regular savings account. It's possible to incur a fee if you exceed six monthly transactions.
Money market accounts differ from money market funds, which are a type of mutual fund.
Money Market Funds
Money market deposit accounts differ from money market funds, also called money market mutual funds. These accounts are not deposit accounts but are a type of investment account offered by investment firms. Money market funds are not savings or checking accounts.
Investors can buy and sell shares in money market funds, which invest in highly liquid assets such as cash and equivalents, government securities, and high-rated debt-based assets that mature in less than 13 months. Money market funds do not come with FDIC protection, and investment returns are not guaranteed.
What Are the Advantages of a Money Market Account Over a Savings Account?
Money market accounts can offer you immediate access to your funds almost whenever you need the money. MMAs often offer check-writing or access via a debit card, and you can usually withdraw funds without paying a fee.
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
Savings and money market accounts offer a deposit account for your savings that pays interest and can be accessed fairly easily. However, some may 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 withdrawal limits posed by money market accounts.
Article Sources
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National Credit Union Administration. "Share Insurance Coverage."
Federal Deposit Insurance Corp. "Your Insured Deposits."
Federal Reserve System. "Regulation D Reserve Requirements." Page 3.
Federal Register. "Regulation D: Reserve Requirements of Depository Institutions."
Federal Deposit Insurance Corp. "National Rates and Rate Caps."
Investor.gov. "Money Market Funds."
Consumer Financial Protection Bureau. "What Is a Money Market Account?"
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