The average American household has $8,863 held in bank savings, according to CNBC. Yet not all of that sits in a checking account. Sometimes, it’s in a savings account. You’re probably familiar with savings accounts. They hold your money in an insured bank account and maybe pay a little interest, but they don’t come with checks.
But there’s another option: a money market account. And for some consumers, a money market account is a more attractive option because they tend to have higher yields and allow you to write checks. But which one’s right for you?
Before you decide, it pays to understand what a money market account is and how it differs from the savings accounts you’re accustomed to.
What Is a Money Market Account?
Money market accounts work similarly to savings accounts. They occupy the same niche in your banking: a risk-free place to hold cash so you can access it instantly.
Like savings accounts, money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration. That means if your bank goes under, the federal government guarantees your money, up to $250,000. And that’s plenty for most of us, as few people leave that much cash in their asset allocation.
The Federal Reserve caps both money market accounts and savings accounts at no more than six withdrawals or “convenient transfers” each month. That includes ATM withdrawals, checks, debit card swipes, or online transfers.
Money market accounts pay similar interest rates as high-yield savings accounts, at least at their highest offers. For example, as of early June 2020, UFB Direct paid the same interest rate for both its high-yield savings and its money market accounts.
Some banks pay interest on a sliding scale, based on your balance. The higher your balance, the higher the interest they pay.
Unfortunately, both money market accounts and high-yield savings accounts often require hefty opening balances. These can reach heights of $5,000 or more. Not all banks require a minimum opening deposit, but as a general rule, those paying higher interest tend to require higher opening deposits.
Banks sometimes charge monthly maintenance fees if your account falls below a certain balance as well. These run the gamut from no minimum balance requirement to balances of $25,000 or more required to avoid monthly fees.
Every bank charges fees if you exceed the allowed number of withdrawals each month. As noted above, the Federal Reserve restricts these accounts to six withdrawals per month, and some banks set their own limit lower — at least to avoid paying a withdrawal fee.
Another increasingly common account fee includes paper statement fees. If you don’t opt for digital statements, the bank charges you a monthly fee.
And, of course, all banks charge an insufficient funds fee if you overdraw your account.
How Do Money Market Accounts Differ From Similar Accounts?
While money market accounts often come with checks, they aren’t checking accounts.
While banks design checking accounts as daily operating accounts with money flowing in and out regularly, money market accounts only allow a few withdrawals each month. They share more in common with savings accounts, albeit with checks and sometimes higher interest rates.
Differences: Money Market vs. Savings Accounts
The most significant difference between a money market account and a savings account is check and debit card access.
Money market accounts typically come with both, unlike savings accounts. You can generally write checks directly from your money market account and swipe your money market debit card at retailers or ATMs.
But since you can only do it only up to six times per month, that differentiates money market accounts from checking accounts.
Money market accounts usually pay higher interest rates than vanilla savings accounts, putting them in the same ballpark as high-yield savings accounts.
Money Market Accounts vs. Money Market Funds
All too often, people confuse money market accounts with money market funds. Despite the similarity in name, the two actually have less in common than money market accounts and savings accounts.
Money market accounts are bank accounts opened at your regular depository bank or credit union. In contrast, money market funds are investments, which you buy through a brokerage account such as You Invest by JP Morgan or TD Ameritrade. You can also buy them through your individual retirement account (IRA) or Roth IRA. They’re not FDIC- insured. Investments can lose money.
Still, money market funds come with far lower risk than most investments. They’re a type of mutual fund that holds short-term investments like Treasury securities, cash, and cash equivalents. They typically pay low but reliable dividends.
Do I Need Both a Savings & Money Market Account?
You don’t really need both a money market account and savings account.
Both accounts serve the same fundamental purpose of holding cash savings securely. In particular, both make a great place to park cash for your emergency fund. Although you may choose to split your emergency fund into multiple layers, with some in cash in a savings account or money market account, some in low-risk investments like a money market fund, and additional protection through insurance policies and untapped credit cards.
But that doesn’t mean you can’t open both. You may opt to keep an emergency fund in one account, and additional accounts for specific expenses like home repairs or saving up a down payment.
How Do I Choose?
Again, the two accounts are so similar that both occupy the same banking niche. But their one core difference revolves around ease of access to your money, which helps you determine which best suits your needs.
If you expect to tap your savings somewhat regularly, look to money market accounts for their checks and debit cards. You can swipe your debit card as needed — no muss, no fuss.
But that same ease of access cuts both ways. The entire point of savings is to avoid touching it. Many investors aim to make it harder rather than easier to access savings. I keep my cash savings at a separate financial institution altogether from my checking account to avoid thinking of it as “available.”
If you worry about temptation, consider opening a high-yield savings account with no debit card at a separate bank. That forces you to log in separately and transfer it to your checking account to access it.
Where Should I Open a Money Market Account?
Most major banks and credit unions offer money market accounts. But not all offer attractive interest rates. Interest rates continuously fluctuate as the Fed adjusts the federal funds rate, so research which banks currently offer the highest-interest money market accounts.
Where Do Banks Invest My Cash?
Banks don’t keep every penny of every account holder’s money in a giant vault. They reinvest your money elsewhere to earn a margin on it.
For FDIC-insured accounts, banks can’t just invest your money in the stock market and hope for the best. Most often, banks invest your money in low-risk, short-term debt obligations. That maximizes the safety of your money but still provides a small margin for the bank between what they earn and what they pay you. These short-term debt obligations are usually from highly rated companies and government agencies.
Banks also invest some of their deposits in loans to other clients, such as mortgages, auto loans, and personal loans. But the federal government strictly regulates how much cash banks must hold in reserve, and again, the FDIC insures your balance in the extremely rare event that a bank folds.
If you don’t yet have at least one month’s expenses saved as an emergency fund, start with just one savings-style account, whether that be an actual savings account or a money market account.
Once you’ve reached that milestone, you can open a second account to hold a different type of savings. Consider opening individual accounts for specific savings goals, such as buying a home or car or that international vacation you’ve been dreaming about.
Most of all, look for an account that combines the highest rate of return with the lowest minimum balance requirement. Don’t expect to retire early on the interest you earn, but it makes a perfect holding account to earn a little interest on your cash savings.
Which do you plan to use, a savings account or a money market account? Or do you plan to open multiple accounts, and why?