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In an economic moment defined by historically low interest rates and an industry-disrupting rise in online banking—wherein high-yield savings accounts from online banks regularly top the lists of best APYs—where do money market accounts fit in?
Well, it’s complicated, according to experts.
Money market accounts, in practice, are similar to savings accounts: Your deposits are federally insured, can earn interest, and are subject to limited withdrawals each month. Unlike savings accounts, money market accounts may come with check-writing or debit card access for increased liquidity, but also tend to charge more fees or higher minimum balance requirements for account opening and maintenance.
The historical incentive of money market accounts revolved around scoring a higher interest rate than you could on a savings account. But today, that incentive isn’t as clear. Interest rates are at or below 1% nearly across the board, and online banks make it easier than ever to score a competitive savings rate with no fees or minimums.
Still, depending on your goals and the details of your financial plan, money market accounts might play a role in your savings strategy.
Here’s what you need to know about money market accounts and more about how you can choose the savings product to reach your financial goals.
A Look Back at Money Markets
“Many years ago, there was a difference between savings accounts and money market accounts that was driven by bank regulations,” says Adam Stockton, director of consumer pricing at Novantas, an advisory firm for financial institutions.
Before the early 1980s, the amount of interest banks could offer on savings and other deposit accounts was restricted under Regulation Q, which led consumers who wanted to earn interest on their deposits to open money market mutual funds in order to cash in on the period’s high rates (while taking on more risk).
Among other legislation during this time, the 1982 Garn-St. Germain Depository Institutions Act allowed banks to begin offering new money market deposit accounts at a “money market” rate, which surpassed the ceiling restriction. These accounts provided an alternative for consumers looking to earn interest on savings without moving their cash to money market mutual funds. It wasn’t until 2011 that Regulation Q was removed altogether as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Fast-forward to 2020, following the repeal or modification of these regulations that necessitated money market accounts to begin with. “There is essentially no difference” between savings accounts and money market accounts today, Stockton says.
High Yields, Evolved
Rather than market similar, yield-earning deposit products as savings versus money market accounts, one tactic banks use is to offer savings products on a spectrum, Stockton says.
“There’s often an entry-level savings account where there’s nearly unlimited access, no minimum balances, no fees. And then there’s another—sometimes it’s called a money market account, sometimes it’s called another savings account—with a potentially higher minimum balance, maybe a tiered interest structure, maybe more limits on how you can access your money.”
These higher-earning accounts are for people looking to score the best rate. But they can also require higher minimum balances or opening deposits, targeting those customers who are willing to deposit large sums or keep substantial amounts in their account longer.
Rather than focusing on the account name, look to the account details for characteristics suiting your needs best, like accessibility and balance requirements.
“Traditionally, the first type of account might be called a savings account and the second account might be called a money market account, but that’s not necessarily true any longer,” Stockton says. “At some banks, they’re both called savings accounts, for example. The nomenclature is almost archaic at this point.”
So, Why Get a Money Market Account?
Outdated terminology or not, the benefits of money market accounts haven’t disappeared—and can even set them apart from high-yield savings account options in some cases. If you’re looking for a secure place to keep your money while earning a bit of interest, money market accounts can be great options.
They’re highly accessible, secure, and can still earn great rates even in today’s environment. If interest rate is a big factor in your search for a savings account, include money market accounts in your search; many offer comparable APYs to the top high-yield savings options and could potentially outpace them when rates begin to rise.
And high liquidity in the form of check-writing or debit card capabilities can make money market accounts especially useful in the case of an emergency fund, where you can’t predict when you’ll need to access.
A money market account may also be a useful savings tool to keep money you don’t want to spend at a distance. If you already have cash saved that aligns with the minimum deposit requirement, stowing it away in a money market account at a different bank than your current one can be a great “out of sight, out of mind” tactic to curb spending temptations.
Just make sure you read the fine print of any new account before opening to avoid fees and penalties.
In today’s environment, money market and high-yield savings accounts earn nearly identical yields. Look for other details, such as fees, minimum balance requirements, and accessibility to determine which account best fits your savings goals.
Will Money Market Accounts Ever Make a Comeback?
Given the historical differences were driven by now-defunct regulations, a comeback is unlikely, Stockton says.
The speedy rise of online banking presents another obstacle; some online banks do offer money market account options, but many offer their competitive deposit accounts take the form of high-yield savings accounts.
“These are online banks that are going to have lower expenses,” says Lamar Watson, CFP, founder of Dream Financial Planning in Reston, Virginia. “Maybe they don’t have branch offices, and maybe they don’t have bank branches, so they’re going to have much lower overhead so they can pass those savings along to consumers. It’s a combination of the high-yield savings accounts and people realizing that money markets aren’t as advantageous.”
Those cost-effective online banks customers continue to flock to can weather today’s historically low rates while maintaining competitive yields. For traditional banking institutions that historically marketed money market accounts as a higher-yield alternative to savings, that’s not as viable an option.
Focus on Goals, Not Account Names
Ultimately, it doesn’t make much difference whether the high-yield, liquid account into which you deposit your savings is called a money market account or a high-yield savings account, as long as it fits your goals and savings needs.
And in today’s historically low rate environment, it can be advantageous to look at account details beyond yield alone to determine which works best for you.
“We haven’t been in a ‘normal’ interest rate environment since 2008-2009, so are we going to come back to a point where we can get a return by holding cash?” Watson says. “I don’t have a crystal ball, but you have to have your cash, you have to realize this is the environment we’re in now, and you have to adjust your expectations.”
Make sure your account is FDIC-insured, doesn’t charge fees or have high minimum balance requirements. Consider the convenience of the account: would you rather have the option to withdraw from an ATM and visit a bank branch, or are you comfortable conducting all your banking online or via mobile app?
And though rates aren’t the only deciding factor, APY should still play into your decision.
“Consumers will need to get used to not seeing the eye-popping 2+% savings rates they had been seeing, but there are offers out there for customers who are looking for better rates as part of their overall savings and investing strategy,” Stockton says.