It’s a good time to be a saver, as the Fed is expected to continue increasing interest rates — and many Americans are taking advantage.
In fact, 60% of U.S. adults say they were able to build up their personal savings over the past two years, and 69% of that group said they plan to maintain their new savings rate in the future, according to Northwestern Mutual’s 2022 Planning and Progress Study.
If you’re part of that majority, not only is it important to consider how much you save, but also where you keep your cash.
Two common options for saving money are savings accounts and money market accounts. Though they work very similarly, there are some differences to keep in mind before you open a new account. They account type that’s best for you is dependent on how much money you have available and the intended use for the funds.
Here’s what you need to know to choose the best vehicle for your savings:
Money Market Account vs. Savings Account: What’s the Difference?
Both money market accounts and savings accounts are liquid, low-risk accounts best used for an emergency fund or short-term savings goal. Here are some key differences between them:
- Interest Rates: Traditionally, money market accounts had higher APYs than savings accounts. However, that’s not usually the case today. There are plenty of high yield savings account options with rates just as competitive as money market accounts.
- Checking Privileges: With a savings account, you can usually only make withdrawals by transferring money to a checking account or by visiting a bank or credit union branch and requesting a withdrawal through a bank teller. By contrast, money market accounts often include checking privileges, meaning you can write checks to pay for things from the account.
- ATM Use: Savings accounts usually cannot be accessed by ATM. But with a money market account, you may receive a debit card that you can use to withdraw cash at an ATM. Just know that some banks and credit unions limit the number of withdrawals or transfers you can make per month.
- Minimum Balance Requirements: Money market accounts usually have higher minimum balance requirements than savings accounts. And they may offer higher rates for different balance levels. For example, a money market account may offer one rate for balances under $10,000 and another rate for balances up to $25,000.
What Is a Savings Account?
A savings account is simply a risk-free place to store your cash with a bank. You can withdraw your money at any time, and there’s no market risk or volatility, since savings accounts are not invested like an index fund or other investment account.
Traditional banks, online banks, and credit unions are all great places to find savings accounts. Savings accounts are bank accounts specifically designed to help you save for your goals. Consider using a savings account to build an emergency fund, save for a dream vacation, or tuck money away for a down payment on a house.
While minimum amounts to open an account vary by bank and credit union, you can typically open a savings account with as little as $1 — though some high yield accounts may require higher minimum deposits.
Savings accounts can earn interest. The amount of interest you can earn is expressed as an annual percentage yield (APY) — the amount of money you can earn in interest over a year. Traditional savings accounts from large financial institutions offer the lowest APYs. You can get much higher interest on your savings (even upwards of 1%) with a high yield savings account.
However, savings account APYs are relatively low. That’s why they’re not great places to grow wealth or keep funds you intend to use for long-term goals like retirement.
What Is a Money Market Account?
A money market account can also be a useful savings tool, according to Danielle Miura, a certified financial planner (CFP) and founder of Spark Financial. “It serves as a mixture between a savings account and a checking account.”
Money market accounts are also available from banks and credit unions, including online banks. Like savings accounts, they’re most useful for shorter-term savings, whether you’re looking to stash your emergency fund or put money away for a down payment you plan to make in a few years.
In the past, money market accounts were much more competitive, and experts recommended them as a way to get a higher yield than traditional savings accounts.
But according to Darcy Borella, a CFP and Zoe-certified advisor with Maia Wealth, attitudes towards them have cooled recently. “The main reason is the interest rate associated with money market accounts,” she says.
One big difference between money market and savings accounts is how you can access your cash. With a money market account, you may be able to withdraw money from your account at an ATM, or write checks to pay for transactions from the account.
However, money market accounts also typically come with higher minimum deposit requirements to open an account, Borella says. You may also earn a lower APY if you maintain a balance below a specified amount.
Previously, the Federal Reserve limited the number of withdrawals or transfers you could make from both savings accounts and money market accounts under Regulation D for savings deposits. In the past, you could only make six transfers or withdrawals per month. Although the Federal Reserve removed the limit on withdrawals for savings accounts and money market accounts in 2020, some banks still independently enforce a six-per-month limit.
Which Type of Account Offers the Highest Interest Rates?
When it comes to interest rates, you can find competitive APYs from either account type. The average APY for savings accounts was 0.07% as of May 2022, while the average APY for money market accounts was 0.08%, according to data from the Federal Deposit Insurance Corporation (FDIC).
High-yield savings accounts from online banks tend to offer higher APYs than you’ll find from most savings and money market accounts available from brick-and-mortar banks. Some online savings account rates are even upwards of 1% APY.
However, you can find much higher interest rates than those averages. There are plenty of options for both money market account rates and savings account rates available today with APYs more than ten times the national average.
Still, from a historical perspective, APYs are quite low right now. The Fed is only just starting to raise rates after being at near-zero through the past few years of the pandemic. Over the next several months, experts predict banks will continue to increase APYs on deposit accounts across the board.
But even as those rates rise, they’re still relatively low. With such low APYs, only keep the cash you need on hand in case of emergency or for the near-term savings goals in a savings or money market accounts.
To protect against inflation, the rest of your cash should be invested in the stock market, with a diversified and risk-adjusted portfolio. For context, U.S. stocks averaged 10-year returns of 9.2% over the past 140 years, according to analysis by Goldman Sachs.
If you need help developing an investment portfolio or deciding where to allocate your money, you can search for a fee-only financial advisor near you through the National Association of Personal Financial Advisors.
Pros and Cons of Money Market Accounts and Savings Accounts
Both money market accounts and savings accounts are useful tools to plan for future priorities or to prepare for unexpected emergencies. When deciding which account is best for you, it can help to weigh the pros and cons of each:
|Money Market Accounts||• Historically higher APYs|
• Offers checking privileges
• May include debit card access
|• Can offer lower APYs on lower balances|
• Higher minimum deposit
• May have monthly account or service fees
|Savings Accounts||• High APYs on high-yield savings accounts|
• Low minimum deposit
• Lower or fewer fees
|• Traditional savings accounts have lower APYs|
• Money cannot be accessed with check or debit card
• May have monthly account or service fees
Which Account is Right for You?
The best way to decide between a money market account and a savings account is to compare specific accounts with a fee structure, minimum deposit requirement, and APY that suits your goals.
If you have a smaller amount of money on hand, a savings account may be a better choice since savings accounts usually have lower account minimums and lower fees than money market accounts. However, if you’d like simpler access to your money through checks or debit transactions and you can meet the minimum deposit requirements, a money market account could be a better option for you.
Both account types are safe, accessible places to store your cash, and the differences are relatively minimal. The most important thing you’ll want to find is an easily accessible account (whether you prefer online or in-person access) with a competitive APY that offers a small return on your savings.
As you compare your options, here’s a list of details to look at for each account:
- Minimum Balance: Banks and credit unions can set their own limits for minimum deposits required to open a savings account or money market account. Generally, savings accounts have lower minimum balances than money market accounts.
- Fees: Financial institutions may charge monthly service fees or account fees, though they may waive the fee if you maintain a minimum daily average balance or enroll in direct deposit. Many of the best accounts charge no fees at all.
- Rates: Rates vary a great deal between financial institutions. Generally, online banks offer higher APYs than brick-and-mortar institutions because they have fewer overhead costs.
- Rate Restrictions: Be sure to read the fine print. While some financial institutions may advertise high APYs, the rates may be limited to customers with high account balances.
- Withdrawal Restrictions: Although the Regulation D six-per-month rule has ended, many banks and credit unions still enforce restrictions on withdrawals. If you plan to make several withdrawals per month, you may incur additional fees.
- Bank Access: Although online banks tend to offer higher APYs and are insured just like traditional institutions, some people may prefer having a physical branch nearby. “A lot of people don’t trust online banks as much as a brick-and-mortar bank,” says Miura. “And so that may be a determining factor when choosing a bank.”
Money Market Account vs. CD
Certificate of deposit (CD) accounts are another common option for safekeeping your savings. However, you’ll have much more restricted access to your cash than you would with a money market or savings account.
When you open a CD, you set aside a fixed amount of money in an account for a specific period of time, usually one to five years. In exchange for keeping your money in that account and leaving it untouched, the bank will pay you interest. Typically, CDs earn a higher APY than savings accounts and money market accounts. As of May 2022, national average CD rates ranged from 0.03% APY for one-month CDs to 0.39% for five-year CDs, according to the FDIC.
But CDS are less liquid than money market accounts. You cannot touch money in the CD until it reaches its maturity date. Otherwise, you’ll have to pay significant penalties. You also lock in the CD’s rate when you open it; if national APYs increase — as they’re expected to in today’s rising rate environment — you can’t take advantage of the higher rates without cashing out the CD and paying penalties.