Once you've started to accumulate some savings, you may be wondering where you should keep that money, especially given that most traditional savings accounts offer pretty nominal interest rates. If you want to keep your funds liquid, one alternative is a money market fund. This type of investment account allows you to write checks and easily transfer money to your savings account, but has higher returns than a savings account.

Key Takeaways

  • Savings accounts and money market deposit accounts are backed by the Federal Deposit Insurance Corporation (FDIC).
  • Meanwhile, money market mutual funds have no such FDIC guarantee. 
  • Both types of money market accounts have high liquidity and accessibility, but money market funds tend to offer higher returns.
  • When picking a money market mutual fund it’s best to focus on ones with low operating costs. 

Money Market Mutual Funds 

A relatively low-risk investment, money market mutual funds pool money from lots of individuals and invest in high quality, short-term securities. While they are technically investments, they act more like cash accounts since the money is easily accessible. They may not yield as high a return as investing in the stock market, but they carry much less risk and still tend to have better returns than an interest-bearing savings account (though there is no guarantee on returns).

The performance of money market funds is closely tied to the interest rates set by the Federal Reserve. When interest rates are very low, these funds may not outperform a savings account once you take fees into account. So it's important to do your research before moving your money into a money market fund.

Money market mutual funds may have a minimum initial investment, as well as balance requirements and transaction fees. There are also associated fees that bank accounts do not incur, including the expense ratio, which is a percentage fee charged on the fund for management expenses.

The dividends in mutual funds can be taxable or tax-free, depending on what the fund invests in. They are not insured by the Federal Deposit Insurance Corporation (FDIC), though they are carefully regulated by the Securities and Exchange Commission (SEC).

Money Market Deposit Accounts

While money market accounts sound very similar to money market mutual funds (and people often confuse the two), these are actually more similar to savings accounts, with some of the benefits of a checking account as well.

Money market accounts often have higher minimum investments and balances than regular savings accounts but offer higher returns. They also allow account holders to write a limited number of checks or make limited debit card purchases from the account each month (up to six total). They may have monthly fees attached, but if you do your research you should be able to find one with no monthly fees.

One important difference: Money market accounts are held at banks or credit unions. They are FDIC insured if they are at a bank, and insured by the National Credit Union Administration (NCUA) if they are at a credit union.

Interest rates, fees, and balance requirements can vary widely. Spending time to find an account with good returns and minimal fees can save you money in the long run.

Savings Accounts 

Savings accounts at banks or credit unions are a safe, convenient place to store money as you save up for a big purchase or for the future. (Many people use traditional savings accounts to hold their emergency funds.)

Savings accounts are interest-bearing, which means that they earn money, growing over time. They tend to pay lower interest rates than money market deposit accounts or mutual funds, though some online banks offer high-yield savings accounts that have more competitive interest rates. Like money market deposit accounts, they are FDIC or NCUA insured.

Which Account Is Right for You?

Deciding whether to hold your money in a money market mutual fund, a money market deposit account, or a traditional savings account will depend on the amount of money you have to save and how frequently you need to access it. Investigating the details on different options within each group will help you avoid high fees and account minimums.