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.
Here’s what you need to know to choose the best vehicle for your savings:
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:
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.
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.
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.
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
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:
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.
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