Money Market Fund vs. Savings Account: An Overview
Once you've started to accumulate some savings, you may be wondering where you should keep that money. Among the most popular options are money market funds, money market accounts, and regular savings accounts.
All three are highly liquid places to park cash. However, given that most traditional savings accounts offer pretty nominal interest rates, you might find the money market fund or account is a better alternative, as they typically offer higher returns. Most money market accounts, and many money market funds, also allow you to write checks and easily transfer money to your savings account.
- Money market funds, as a type of mutual fund, are 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 (FDIC).
- Money market funds have no such FDIC guarantee, but they are low-risk.
- Both types of money market products have high liquidity and accessibility, but money market funds tend to offer higher returns than money market accounts
- When picking a money market mutual fund it’s best to focus on ones with low operating costs.
Money Market Mutual Funds
Money market funds are a type of mutual fund. They pool money from lots of individuals and invest in high-quality, short-term securities. While they are technically investments, offered by brokerages, investment companies, and financial services firms, they act more like on-demand bank 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, as with most investments, there is no guarantee on returns).
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).
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 Deposit Accounts
While money market accounts sound very 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 of a checking account as well.
Money market accounts are on-demand, interest-bearing accounts 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 higher minimum deposit or balance requirements than regular savings accounts—but offer higher returns, more on a par with money market funds. The interest rates an account offers might vary, depending on the amount of money within it.
They also allow account holders to write a limited number of checks or make limited debit card purchases from the account each month (usually, up to six total). Some may have monthly fees attached, but if you do your research you should be able to find one that doesn't.
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, they permitted to invest in certificates of deposit (CDs), government securities, and commercial paper, which savings accounts cannot do.
Savings accounts offered 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.
As bank products, 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.
The yield on savings accounts is especially low—often below the rate of inflation. And at many of them, that interest rate is fixed. Fixed-rate investments are especially vulnerable in inflationary climates when prices and costs are rising.
The interest rates on money market accounts are variable, so they rise or fall with inflation—an advantage for them, though they still could be outpaced if prices rise rapidly.
Also, money market accounts are still prone to changes in interest rates. If the Fed, in an effort to stimulate the economy, lowers the federal funds rate (at which commercial banks borrow and lend their excess reserves to each other overnight), it often has a ripple effect, resulting 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 might want to opt for a money market account if you have a substantial amount of funds—at least four figures' worth—to deposit, and if you can easily maintain such a minimum balance in the account. For that, you'll be rewarded with a slightly better yield; often, the higher your balance, the greater the interest rate. I
f you want to be able to write checks on the account—or draw from it using a debit card—the money market account also offers these privileges. But since it is earning more interest, it's a good place to keep funds for a fairly long time period, certainly a year at least—towards 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.
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 will depend largely on the amount of money you have to save and how frequently you need to access it.
Another factor: 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, in terms of interest. Admittedly, as an investment vehicle, it isn't quite as safe as the bank accounts—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.
Money Market vs. Savings FAQs
What Are Alternatives to Money Market and Savings Accounts?
A money market fund (MMF) is one alternative to money market and savings accounts. MMFs are mutual funds that invest in short-term debt, like Treasury notes, CDs, and commercial paper; cash; and cash equivalents. These are all very liquid assets, and MMF money is quite accessible—you can often get funds the same day. Some MMFs even come with checks or debit cards. And they don't limit transactions to six times per month, either.
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 (MMA) and a certificate of deposit (CD) are types of 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.
You may be limited as to the number of transactions in a certain period, but you can withdraw or transfer your money easily, and of course close the account if you want to, without penalty. The funds in the account earn interest at a variable rate.
In contrast, with 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, your money—both the principal and the interest earned—is locked up for the term of the CD. You're likely to face a fee or early withdrawal penalty if you do access the funds. So: no checks, no transfers, no 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; though it's not necessary to have the MMA in the same bank as your checking or savings account, there may be special offers or privileges for multiple account holders—or advantages in linking accounts.
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 three most important things are: the interest rate, the interest rate, 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?