Why Choose a Money Market Account Instead of a Savings Account?

If you're looking for a great option to save your money, you don't have to go any further than your bank or credit union. They have many options available—options that give you immediate access to funds while paying you interest. Consider parking your money in a savings account or money market account.

Here, we've listed some of the key characteristics of both accounts, and why you may consider one over the other.

Savings Accounts vs. Money Market Accounts

Most banks—both traditional brick and mortar and online institutions—offer both savings accounts and money market accounts to their customers. At first glance, these two accounts are remarkably similar—both are deposit accounts that pay interest. They are also protected by the Federal Deposit Insurance Corporation (FDIC). Because the point of these accounts is to save rather than for everyday banking, account holders are limited to six withdrawals per month under federal regulations.

Savings Accounts Explained

Banks offer savings accounts to their customers as a complement to their checking accounts. It is a good place for people to put their cash for a short period of time for very short-term needs such as home renovations, vacations, cars, or emergencies like medical or dental bills.

Banks make building a savings account balance fairly easy. The account can be added to a debit card to make deposits as well as withdrawals, transfers through online banking, and wire payments directly into the account from other institutions. They can also be easily liquidated, thereby providing consumers with ready access to funds. But account holders should bear in mind that they are limited to six withdrawals per month. Any other debit transaction beyond that generally incurs a service charge.

This type of account provides the account holder with a very low, moderate rate of interest income. According to the FDIC, the average national rate of interest for a savings account with a balance under $100,000 as of February 8, 2021, was 0.80%, and didn't change for higher balances. These accounts offer lower interest rates than money market accounts and other investments because financial institutions are limited in what they can do with the funds. Banks generally lend this money to others for car loans, lines of credit, and credit cards so they can make money on the interest they charge.

Money Market Accounts Explained

Money market accounts, on the other hand, are not as common as traditional savings accounts, and are offered by banks and other institutions. They are sometimes referred to as money market deposit accounts. They may have some features of both a checking and savings account. Account holders may be able to write checks and do debit card transactions with certain money market accounts. They also have a savings account-like feature, where account holders collect interest on the balance they hold at the end of each month.

Most money market accounts tend to pay a slightly higher interest rate than a traditional savings account, which can make them more attractive for depositors. As of February 8, 2021, the FDIC reported the average interest rate for a money market account was 0.82% for balances under $100,000 and 0.86% for those above $100,000.

Banks are able to invest the money account holders deposit into money market accounts in short-term, low-risk securities that are highly liquid. These include certificates of deposit (CDs), government bonds, or other similar investments. When these assets mature, they give money market account holders a portion of the interest they receive.

Just like a regular savings account, money market accounts also have restrictions on the number of withdrawal and debit transactions they can make. If they go above the six transactions, they incur a fee. Money market accounts also come with minimum balance requirements. Customers who do not meet the required balance may lose out on high interest, or find their account is converted to a regular checking or savings account.

Money Market Funds

Do not confuse money market deposit accounts with money market funds. These are also called money market mutual funds. They are not deposit accounts, but are offered by investment firms. Investors can buy and sell shares in these funds, which invest in very liquid assets such as cash and equivalents, and high-rated debt-based assets that mature in under 13 months. They are not protected by the FDIC and are different in other ways from traditional demand deposit checking and savings accounts.

The Bottom Line

Depositors tend to choose money market accounts because they offer higher interest rates than savings accounts. While the difference in earned interest can be small, it might be enough to offset liquidity constraints if depositors are unlikely to need quick access to their cash.