Money Market Fund vs. Money Market Account (MMA) vs. Savings Account: An Overview
You may be wondering where you should keep the money that you've started to accumulate. Some of the most popular options are money market funds, money market accounts (MMAs), and regular savings accounts. All three are highly liquid places to park cash, which means you can easily access the funds whenever you need them.
But there are some key differences that you should know. Most traditional savings accounts offer pretty nominal interest rates, so you may find that money market funds or MMAs are a better alternative, as they typically offer higher returns. And unlike savings accounts, many money market funds and accounts also let you write checks and easily transfer money to your savings account.
- Money market funds are mutual funds that pool money from multiple investors into different investment vehicles.
- Savings accounts and money market accounts are bank products.
- Savings accounts and money market deposit accounts are backed by the Federal Deposit Insurance Corporation.
- While money market funds have no FDIC guarantee, they are low-risk.
- Money market funds tend to offer higher returns than money market accounts.
Money Market Mutual Funds
Money market funds are mutual funds that are offered by brokerages, investment companies, and financial services firms. They pool money from multiple investors and invest in high-quality, short-term securities. While they are technically investments, they do act more like on-demand cash accounts since the money is easily accessible.
These mutual funds may have a minimum initial investment requirement, as well as balance requirements and transaction fees. There are also associated fees that bank accounts do not incur, including an 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 how funds invest. They are not insured by the Federal Deposit Insurance Corporation (FDIC), though they are carefully regulated by the Securities and Exchange Commission (SEC).
Their performance is closely tied to the interest rates set by the Federal Reserve. Very low rates mean these funds may not outperform a savings account once you take fees into account. So do your research before moving your money into a money market fund. They may also not yield as high a return as the stock market, but they do carry much less risk and tend to have better returns than an interest-bearing savings account. Keep in mind though, that just like any other investment, there is no guarantee of returns.
Money Market Accounts (MMAs)
While money market accounts (MMAs) sound similar to money market mutual funds (and people often confuse the two), they are actually closer to savings accounts. In fact, one way to think of them is as a savings account with some of the benefits that come with having a checking account.
MMAs are on-demand, interest-bearing accounts that are held at a bank or credit union. 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.
Money market accounts often have a minimum deposit or balance requirement that is higher than regular savings accounts. But they tend to offer higher returns, which are more on par with money market funds. The interest rates an account offers may vary, depending on the amount of money you hold in your account.
Some banks allow MMA account holders to write checks and permit the use of a debit card for purchases, transfers, and withdrawals at the automated teller machines (ATMs). Although the Federal Reserve lifted withdrawal restrictions (account holders were only allowed to make up to six withdrawals per month) under Regulation D in 2020, your bank may still limit your ability to access the funds in your account. So it's important to check with your financial institution about the rules associated with your money market account.
Money market funds and money market accounts sound alike because they invest in and generate interest from the same sort of thing: The short-term debt instruments that make up the money market. For example, a money market mutual fund or MMA invest in certificates of deposit, government securities, and commercial paper while savings accounts don't.
Savings accounts are offered to consumers by banks, credit unions, and other financial institutions. They are generally considered to be a safe, convenient place to store your money as you save up for a big purchase or for the future. Because of how liquid they are, savings accounts are well-suited for short-term needs. That's why many people use traditional savings accounts to hold their emergency funds.
These types of accounts are interest-bearing, which means that they earn money, growing over time. They tend to pay lower interest rates than any other type of savings vehicle, including money market deposit accounts or mutual funds, though some online banks offer high-yield savings accounts that have more competitive interest rates. Rates may vary based on how much you hold in your account.
Like money market deposit accounts, savings accounts are FDIC or NCUA-insured.
Money market accounts and savings accounts are considered very low-risk vehicles. But of course, there's the usual tradeoff for safety: Less risk equals lower returns. Put simply, you won't earn as much money in these two vehicles as you would with other investments that come with a higher risk. Here's why:
- The yield on savings accounts is especially low, such that it often falls below the rate of inflation. And with many of them, that interest rate is fixed. Fixed-rate investments are especially vulnerable in inflationary climates when prices and costs rise.
- The interest rates on money market accounts are variable, so they rise or fall with inflation. This is an advantage for them, though they still could be outpaced if prices rise rapidly.
MMAs are also still prone to changes in interest rates. If the Fed decides it wants to stimulate the economy and lowers the federal funds rate (at which commercial banks borrow and lend their excess reserves to each other overnight), that could send a ripple effect throughout the financial markets. This can result in lower interest rates being earned by these bank accounts.
How the interest in your money market or savings account is compounded—yearly, monthly, or daily, for example—can have a substantial impact on its return, especially if you maintain a high balance in your account.
Which Account Is Right for You?
Let's say you want to stick with one of the bank accounts. Investigating the details on different options within each type will help you avoid high fees and account minimums.
When You Should Use a Money Market Account
You may opt for a money market account if you have a substantial amount of money—at least four figures' worth—to deposit. And it makes sense if you can easily maintain such a minimum balance in the account for a longer period of time. You'll be rewarded for that with a slightly better yield. The higher your balance, the greater the interest rate.
If you want to write checks on the account or draw from it using a debit card, the money market account also offers these privileges. But since you're earning more interest, it's a good place to keep funds for a fairly long period of time, certainly a year at least—toward a medium-range expenditure or goal.
When You Should Use a Savings Account
A savings account is a better option if you have a more modest sum (under $1,000) to deposit, and don't want to worry about maintaining account minimums or fees. If check-writing/constant liquidity isn't a concern—aside from the occasional transfer, you're pretty much keeping the money in there—the savings account would work well for you, too.
Since you can withdraw money from it easily and it doesn't earn much, a savings account is well-suited to short-term goals—a place to park funds until your holiday or a big purchase.
What Are Alternatives to Money Market and Savings Accounts?
A money market fund is one alternative to money market and savings accounts. MMFs are mutual funds that invest in short-term debt, like Treasury notes, CDs, commercial paper, cash, and cash equivalents. These are all very liquid assets, and MMF money is quite accessible, which means you can often get the funds on the same day. Some MMFs even come with checks or debit cards.
Another possibility is a high-interest checking account. These have all the features that come with traditional checking accounts—plus, as the name says, they offer interest rates that rival and sometimes exceed those of money market accounts (though they often impose a cap on the amount of the balance they'll pay on). They may also require a certain number of transactions per month.
How Does a Money Market Account Differ From a CD?
Both a money market account and a certificate of deposit are insured, interest-bearing financial accounts offered by banks and credit unions. However, a money market account is an open-ended (that is, ongoing), demand deposit account. That means you have access to your funds pretty much whenever you want them.
Your bank may limit the number of withdrawals or transfers you can make in a certain period, but it is a very liquid account and you can close the account if you wish without penalty. The funds in the account earn interest at a variable rate.
Unlike a CD, you deposit a certain sum with the bank for a finite period—anywhere from a month to 10 years. During that time, the CD earns interest, usually at a fixed rate. It's a higher rate than that offered by the MMA, but the catch is that your money (both the principal and the interest earned) is locked up for the entire term. You're likely to face a fee or early withdrawal penalty if you do access the funds. So no checks, transfers, or liquidity—that's the tradeoff for the bigger yield on your deposit.
How Do I Find a Good Money Market Account?
Since rules and yields for money market accounts vary greatly, it pays to shop around. One good place to start is with your current financial institution. Although it doesn't matter that you have your MMA in the same bank as your checking or savings account, there may be special offers, privileges, or advantages for having multiple accounts or linking them together.
You needn't be limited to your local region—or even to a brick-and-mortar institution, In fact, the highest-yielding accounts are often from online banks, which can pay more since they've less overhead.
When evaluating money market accounts, the most important thing to consider is the interest rate. But there are a few other factors to consider. Among them:
- Minimum initial deposit
- Balance-maintenance requirements
- Accessibility tools, like checks or debit cards
- Number of withdrawals/transactions allowed per month
- What counts as a transaction: ATM withdrawal? Purchase? Electronic transfer?
The Bottom Line
Deciding whether to hold your money in a money market mutual fund, a money market deposit account, or a traditional savings account depends largely on how much money you can save and how frequently you need to access it. Other factors you'll want to consider are how much you want your money to earn and how much risk you want to assume.
A money market fund offers the most bang for the buck, at least when it comes to the returns. It may not be the safest choice compared to money market and savings accounts because there's no federal insurance against loss. But in the grand financial scheme of things, money market funds are exceedingly low-risk and highly liquid, so if you're chasing yield above all else, they could be the best bet.