Cash Fundamentals: Savings Accounts vs. Money Market Accounts
When you want to stash away some of your family's money, it’s likely you’ll turn to the account options provided by local banks, online banks, and credit unions. While it’s common to open a checking and savings account for easy access to your cash, it’s important to consider all of your options - including money market accounts (MMA). Keep reading for more on your family's options and the important considerations to make as you decide which path is right for you.
What is a Savings or Money Market Account Used For?
Before we discuss the difference, why would you want to use one of these accounts at all? Why not just put all your cash in a checking account? Interest! There are checking accounts that pay interest, but they're rare and usually come with limitations, fees, and strings attached. For most us, if you want to earn some level of interest on your cash that means storing some money in an account like a money market of savings account. These accounts can be a place for your family's emergency fund, downpayment for a care, preschool tuition for next semester, or other medium term savings goals.
What Is a Savings Account?
Just as it sounds, a savings account is a bank account specifically used for saving money. Because these accounts are designed to house money on a more medium or long-term basis, they typically offer a better interest rate than checking accounts. For many, a savings account is used to cover unexpected expenses such as a job loss or sudden home repair. In addition, savings accounts can be used to save for short-term goals, such as Christmas, upcoming vacations or house renovations.
To access the money in your savings account, you will typically use your online banking system or app. Savings accounts are not usually accessed through the use of checks or debit and ATM cards. Instead, it is common to link a savings account to a checking account, where these methods of withdrawal are easily used. In fact, Regulation D limits users from withdrawing money from their savings accounts to no more than six times per month. Attempting to withdrawal more than six times could result in penalty fees or account suspensions.
What Is a Money Market Account?
Think of a money market account (MMA) as a hybrid between a checking and savings account. It is designed for medium or long-term savings, but it offers easier access and withdrawal capabilities than a savings account would. When using an MMA, the bank actually invests the funds you deposit into the marketplace.
While MMAs are under similar regulations to savings accounts in regards to withdrawal limits, most money market accounts can be accessed using checks or ATM cards.
A variation on a money market account held at a bank is a money market mutual fund. This type of account is a mutual fund designed to offer modest interest like a bank money market. Because this type of money market is not held at a bank, it does lack the FDIC insurance offered by a bank. Money market mutual funds are, however, still very secure and very unlikely to result in a loss. This type of money market is typically offered at an investment or brokerage company.
What’s the Difference Between a Savings and Money Market Account?
The biggest difference between these two types of accounts, aside from the ability to withdraw, is the interest rate. Generally speaking, MMAs will offer a higher interest rate than a savings account. In turn, however, many MMAs will require a minimum amount to open and remain in the account at all times. The fee structure is different at some banks for these as well. Review this carefully to ensure the interest you earn is not consumed by an unexpected fee or charge. When you consider the choice of a savings account vs. a money market account, think about the purpose of the money you plan to place in the account and future plans for that money.
While they’re similar in nature, there are a few key differences to consider as you decide which bank account type is right for you. While the higher interest rates of an MMA may be appealing, you want to be sure you’re able to make and keep the minimum required amount in the account. And if savings is your biggest concern, will the ability to access your money easily deter your efforts? If so, you may want to set aside what you have in a savings account instead.
As you look to accrue savings and interest, it’s important to weigh all of your options. Remember to consider the interest rates, minimum requirements and accessibility differences of your savings and MMA account options to find what works best for you and your savings goal.
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