Money Market Fund vs. Savings Account: What’s the Difference?

You may be wondering where you should put your savings once you've started to amass some. Money market funds, money market accounts, and conventional savings accounts are among the most popular options. All three are excellent ways to keep cash in a liquid state. Given the low-interest rates offered by most standard savings accounts, you may discover that a money market fund or account is a preferable option, as they often offer higher yields. You can write checks and transfer money to your savings account with most money market accounts and many money market funds.

Money Market Accounts

Money market accounts are more like savings accounts than money market mutual funds. Indeed, they can be thought of as a savings account with some of the advantages of a checking account. Money market accounts at a bank or credit union are interest-bearing, on-demand accounts. If they're at a bank, they're protected by the Federal Deposit Insurance Corporation (FDIC), and if they're at a credit union, they're covered by the National Credit Union Administration (NCUA). Money market accounts have a greater minimum deposit or balance requirements than conventional savings accounts, but they also provide higher yields, comparable to money market funds. Depending on the quantity of money in an account, the interest rates it gives may fluctuate. They also allow account holders to write a certain amount of checks or make a certain number of debit card purchases each month (usually, up to six total). Some may have a monthly fee, but if you shop around, you should be able to find one that doesn't.

Savings Accounts

Savings accounts, which are available at banks and credit unions, are a safe and handy way to keep money while saving for a significant purchase or the future. Many people keep their emergency monies in standard savings accounts. Savings accounts pay interest, which means they generate money and increase over time. They typically pay lesser interest rates than money market deposit accounts or mutual funds, while some online banks offer high-yield savings accounts with higher rates. They are insured by the FDIC or the NCUA, just as money market deposit accounts.

When You Should Use a Money Market Account

If you have a large sum of money to deposit—at least four figures—and can easily maintain a minimum balance in the account, you might want to consider a money market account. You'll be rewarded with a somewhat larger yield as a result; typically, the higher your balance, the higher the interest rate. If you wish to be able to write checks on the account or withdraw money with a debit card, you can do so with a money market account.

Money Market Account Alternatives

Many different types of accounts are available from banks and credit unions, some of which have features that make them competitive with — or even superior to — money market accounts.

Passbook Savings Accounts

Regular savings accounts, unlike money market accounts, usually do not demand an initial deposit or a minimum level. They pay interest as well, though not quite as much as a money market account. Passbook savings accounts, like money market accounts, are insured by the FDIC or the NCUA. With limited exclusions, both limit depositors to six transactions per month.

High-Yield Savings Accounts

Many banks and credit unions also offer high-yield savings accounts, which may provide a higher interest rate than their money market accounts, depending on the organization. High-yield savings accounts are also insured by the FDIC or the NCUA. When compared to money market accounts, they may have more restrictions, such as demanding direct deposits.

Regular Checking Accounts

Checking accounts have one major advantage over money market accounts: they allow for an infinite number of transactions, such as checks, ATM withdrawals, wire transfers, and so on. They are also insured by the FDIC or the NCUA. The fact that they pay such a low (sometimes zero) interest rate is their biggest downside.

High-Yield/High-Interest Checking Accounts

These accounts, like high-yield savings accounts, offer interest rates that are competitive with, and sometimes even better than, money market accounts. They also have the same major flaw as high-yield savings accounts: they may have more stringent criteria, such as a minimum number of debit transactions per month. They frequently specify a limit—say, $5,000—beyond which the exorbitant interest rate does not apply. High-yield checking is similar to ordinary checking in other ways, including unlimited checks, a debit card, ATM access, and FDIC or NCUA protection.

Rewards Checking Account

A sign-up bonus and additional benefits, such as high yields, ATM charge reimbursements, airline miles, or cash back, may be available with this sort of checking account. The principal disadvantage is the same as with high-yield checking: hefty fees unless the depositor complies with all of the requirements, which vary by institution. Otherwise, rewards checking works in the same way as a standard checking account with FDIC or NCUA insurance.

What are the Drawbacks of MMAs?

Transaction limits, fees, withdrawal limitations, and minimum balance requirements are all potential drawbacks. MMA depositors are limited to six transfers and electronic payments per month under federal restrictions. Customers who create an account with a bank or credit union are usually required to deposit a particular amount of money and maintain an account balance above a specified level. If the balance goes below the minimum, many banks will charge a monthly fee. While some MMAs have appealing rates, the majority will be unable to compete with other higher-yielding options. Many different types of accounts are available from banks and credit unions, some of which have features that make them competitive with — or even superior to — money market accounts.

Conclusion

The amount of money you have to save and how frequently you need to access it will determine whether you keep it in a money market mutual fund, a money market deposit account, or a standard savings account. Another consideration is how much money you want to make and how much risk you are willing to take. In terms of interest, a money market fund gives you the greatest bang for your buck. Indeed, it's not quite as safe as bank accounts as an investment vehicle—no, there's federal insurance against loss. Money market funds, on the other hand, are extremely low-risk and liquid in the great scheme of things, so if you're seeking yield above all else, they might be the best alternative.