Most banks offer both money market accounts and savings accounts, although money market accounts are less common. At first glance, these two accounts are remarkably similar – both are interest-paying, both have some liquidity limits and both are protected by the Federal Deposit Insurance Corporation (FDIC). However, most money market accounts tend to pay a slightly higher interest rate, which can make them more attractive for depositors.

Financial institutions are limited in what they can do with funds in a savings account but have more flexibility when it comes to money market accounts. They are allowed to invest capital into certificates of deposit (CDs), for example, or government bonds, or other low-risk investments. This allows most institutions to offer higher interest rates on money market accounts, drawing money away from savings accounts. As of September 2018, money market accounts were offering an average annual percentage yield (APY) between 0.08% and 0.11%; savings accounts averaged a 0.08% APY at best.

Other differences between a money market account and a savings account are not significant. Savers who have a history of withdrawing funds from savings accounts on a regular basis may want to avoid money markets, which have restrictions on how often withdrawals can be made. Some even require a waiting period to receive money.

In the end, 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.

Finally, do not confuse money market deposit accounts with money market mutual funds. Money market mutual funds are not protected by the FDIC and are different in other ways from traditional demand deposit (checking) and savings accounts.

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  2. How liquid are money market accounts?

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  3. What economic factors affect savings account rates?

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