Money Market vs Savings Accounts, Which Is Better?
BY: Melanie Lockert | November 30, 2020
Right now saving is more important than ever. You want to protect yourself financially, especially when so many things are uncertain. There are various savings options to choose from, such as money market accounts and regular savings accounts. We’ll cover what exactly these accounts do and share the pros and cons to help you decide what is right for you.
What is the difference between the types of accounts?
When it comes to personal finance, saving money should be a top priority. The two easiest accounts for savings are traditional savings accounts and money market accounts. Both are protected by the Federal Deposit Insurance Corporation (FDIC), both do not have a penalty for early withdrawal should you need a safe place to store your money with access, and both can be accessed through mobile banking. Here, however, we will explain the differences and pros and cons.
Savings accounts
A savings account is the most traditional type of savings vehicle. As the name suggests, it’s meant for saving through a financial institution. You might think of your checking account as your "spending" account and your savings account as your "saving" account. Traditional savings accounts accrue interest on account balances, but the annual percentage yield (APY) is fairly low. The average APY for a traditional savings account is 0.05%. But an interest-bearing high-yield savings account has better interest rates — you can find these at up to 1% APY.
Savings accounts are more limited than checking accounts, as, in theory, you don’t want to touch that money unless you have to. You can’t write checks or use a debit card with a savings account but you can transfer electronically to other bank accounts, like your checking account.
Money market accounts
A money market account is a type of savings vehicle that allows you to earn interest on your deposits. In fact, money market accounts have an even higher APY than traditional savings accounts. The APY on money markets may sometimes beat even a high-yield savings account but in this environment, they’re pretty close. The national average on money market accounts is 0.08%.
One of the main differences between a savings account and a money market account is that you can do more with a money market account. You can write checks from your money market account and may even get a debit card. Money market accounts often require a higher minimum balance.
Pros and cons
Though money market accounts and savings accounts are similar, they have some important differences.
Money market account pros
Easy accessibility with check writing. Using your money market account, you can write checks if you need to. So while your money is stashed away, you can easily access it and write checks from the account.
Competitive, higher interest rates. The APY on money market accounts are typically higher than traditional savings accounts. That means you’ll get the most bang for your buck when you save.
Safe and less risky. Money market accounts are FDIC-insured which means if your bank flops, you are covered up to $250,000. Plus, this is a pretty safe vehicle to put your money and isn’t as risky as investing.
Money market cons
Opening deposit. Some money market accounts require an opening deposit. For example, Discover has a minimum deposit of $2,500. There are others, such as Ally Bank, which has no opening deposit. You want to see if there’s an opening deposit as you don’t want that to deter you from starting to save.
Minimum balance. If you want to score the best APY, you typically need to have a high minimum balance. For example, at the time of writing Discover offers a .40% APY for balances below $100,000 and offers .45% for balances with more than $100,000.
Monthly fees. Some money market accounts could hit you with a monthly fee if your balance drops below a certain level.
Savings account pros
No opening deposit. Savings accounts are easily accessible to anyone as many banks have no opening deposit at all. That means you can get started with saving ASAP, regardless of how much money you have on hand.
Easy access to your cash. It’s easy to set up a savings account with the same bank where you have your checking account or to open a new one. You can put money aside in savings, but it’s also easy to access your cash and transfer to checking when you need it.
No fees. Many online banks offer savings accounts that have no fees at all. So you don’t have to deal with annoying monthly maintenance fees or overdraft fees.
Money market cons
Interest rate. Traditional savings account rates are pretty low-interest and hardly earn any interest. If you go with a high-yield savings account, you could earn more, but in general savings accounts have lower interest rates that aren’t competitive with money market accounts.
Limited access. You can’t access your savings account via a debit card or check and are limited to six withdrawals a month. Currently, that is waived due to the pandemic.
Monthly fees. Some banks like Bank of America charge a monthly maintenance fee if your balance is lower than a certain amount. For example, you will be charged $8 per month, if you have less than $500 in your savings account.
As you can, money market accounts and savings accounts are similar but have some key differences.
Which one should you choose?
If you’re looking for a savings vehicle and comparing money market accounts vs savings accounts, you want to assess your financial goals. Here are some things to consider when choosing:
- What is the purpose of the account?
- What are you saving for?
- Do you plan on spending that money within the next six months?
- Do you have a savings target in mind? (e.g. $10,000)
- Are there any fees?
- What is the Annual Percentage Yield (APY)?
- Is there a minimum deposit?
- Are there minimum balance requirements?
- Is it convenient to access your money?
- Is it convenient to put money into your account?
- Is there a mobile app for Android and iPhone?
Answering these questions can help you decide which account is a better fit:
Saving for an emergency fund
Everyone should have an emergency fund. Ideally, you want to have the recommended 3 to 6 months' worth of expenses. In this case, either a savings account or money market account could work.
If you’re looking at traditional savings accounts, a money market account will be better as the APY will be higher. If you’re comparing high-yield savings accounts and money market accounts, check the APY. They might be pretty similar.
One thing that makes money market accounts less attractive for an emergency fund is the fact that you can write checks and use a debit card with the account. In that way, a savings account could give you more distance and less temptation. An emergency fund should only be used for emergencies so if you know you’re likely to dip into your account, high-yield savings accounts are likely a better option for you.
Saving for a vacation
If you’re saving for a vacation or other short-term goal, a savings account and a money market account are both attractive options. If you go with an online bank, you can probably get a savings account with a high APY.
A money market account may offer a comparable rate. On one hand, a money market account is a good option because when you need the money, you can write a check or access the money with a debit card to buy things. But if you know that having access to that would tempt you, high-yield savings accounts would be a better option.
Saving a down payment
Let’s say you’re saving for a down payment and want to make sure your contributions are safe and earning interest. In this case, a money market account is likely better because you can access higher interest rates. Plus, many money market accounts have minimum balance requirements, making it ideal for big savings goals like a down payment on a home.
Regardless of which type of account you choose, the two most important things you want to compare are:
- Annual Percentage Yield (APY)
- Fees
Also, you can have both accounts if you’d like. For example, you could save your emergency fund in a high-yield savings account, while saving for a down payment or home improvement project in a money market account. That way you’re getting the best of both worlds and each account caters to your needs.
Best money market accounts
If you want to move forward with a money market account, here are some of the best money market accounts to choose from.
Discover
Discover has a money market account with a minimum opening deposit of $2,500. Though there is a high opening deposit, the account has zero fees. So no monthly maintenance fees or insufficient fund fees. You can score a higher APY if your balance exceeds $100,000.
CIT Bank
Another money market account option comes from CIT bank. The website claims you can earn more than 7x the national average. On top of that, there are no monthly service fees. You can open an account with a $100 opening deposit. After that, there are no minimum balance requirements.
Best savings accounts
If you’re looking into savings accounts, it’s best to go with an online bank that offers a high-yield savings account. That way you can get the highest APY you can and earn interest on your money. Here are some of the best savings accounts to choose from.
Ally Bank
Ally Bank has an online savings account that offers a high APY and has no monthly maintenance fees. On top of that, there are also no account minimum balance requirements. You can set up "buckets" to save for different financial goals, from an emergency fund to a vacation.
Capital One
You can also check out Capital One’s savings account option with 360 Performance Savings™. This account gets you an APY that is 5x the national average. This is one of the best savings accounts because there are no monthly maintenance fees, no minimum opening deposit, or minimum balance requirements. They also have a highly rated mobile app.
The bottom line
Money market accounts and savings accounts can both help to get you where you need to go with your financial goals. Each account has pros and cons. Consider any minimum opening deposits and minimum balance requirements as well as fees. You can choose one or the other or you could always open both, each for a different money goal.