Money Market Accounts vs. Savings Accounts



Next video:
Loading the player...

A money market account is an interest-bearing account that pays a higher interest rate than a savings account, and gives the account holder limited check-writing ability. It combines the benefits of savings and checking accounts, but usually requires account holders to maintain a higher balance in exchange for the higher interest rate.

Summer has checking and savings accounts at her bank, but the checking account pays 0.5% interest and the savings account pays 1% interest. She doesn’t write many checks, her average daily balance is $5,000, and she wants to earn a higher interest rate without taking on more risk. She learns that her bank offers a money market account, which lets her write up to six checks per month and requires a minimum balance of $2,500. It’s FDIC-insured, like her checking and savings accounts, but pays 1.5% interest.

Summer decides to close her savings account and move most of her money into the money market account. She keeps some money in her checking account to pay her bills. The interest Summer earns on her money market account is taxable, but so was the interest she earned from her savings account. The bank invests her deposits in low-risk assets like certificates of deposit, U.S. Treasuries and commercial paper.

Money market accounts are widely available through banks and other financial institutions. When Summer makes her annual contribution to her Roth IRA, she learns her brokerage has a better money market account paying 1.9% interest, so Summer moves her money again. Her brokerage operates online and has lower overhead than her bank, so it can afford to pay account holders a better interest rate. Even though Summer’s new money market account is with a brokerage, it is still FDIC-insured, and her money is still invested in low-risk assets.

Related Articles
  1. Investing News

    Money Market Funds: Enough Regulation Already?

    Since September, the Securities and Exchange Commission (SEC) has been sitting on proposed rules for money market mutual funds that would affect 61 million individual investors plus untold businesses ...
  2. Retirement

    Introduction To Retirement Money Market Accounts

    Money market funds are used in retirement plans and accounts because they are liquid, stable and pay competitive rates of interest.
  3. Retirement

    The Money Market

    If your investments in the stock market are keeping you from sleeping at night, it's time to learn about the safer alternatives in the money market.
  4. Credit & Loans

    Refinance Vs. Debt Restructuring: What's Best For Your Credit Score?

    Discover key differences between refinancing and restructuring debt in regard to terms, the negotiation process and effect on credit scores.
  5. Investing Basics

    Explaining Rehypothecation

    Rehypothecation occurs when an asset used as collateral for one party is reused in another transaction.
  6. Economics

    Understanding Cash and Cash Equivalents

    Cash and cash equivalents are items that are either physical currency or liquid investments that can be immediately converted into cash.
  7. Technical Indicators

    Key Financial Ratios to Analyze Retail Banks

    Learn about key financial metrics that investors use to evaluate retail banks, and how the industry is fundamentally different from most other industries.
  8. Professionals

    Why Investors Should Consider Cash Right Now

    With so many market watchers thinking that the current stock rally is getting long in the tooth, investors might considering upping their cash holdings.
  9. Investing

    Payroll Processors, Regional Banks await Rate Hike

    Short-term interest rates are creeping higher, which is good news for money market fund managers, payroll processors and consumer banks.
  10. Economics

    What's an Irrevocable Letter of Credit?

    An irrevocable letter of credit (ILOC) is a financing vehicle used to facilitate commerce between two parties who are not familiar with one another.

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!