This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
Want to save money for your future? A savings account seems like the obvious choice.
But there’s another option out there called a money market account. It’s like a hybrid between a savings account and a checking account.
If you’ve been debating on opening a savings account or money market account, now might be a good time.
In response to rising inflation, the Federal Reserve said it will increase interest rates in 2022. Both money market and savings accounts are expected to benefit from these higher rates.
In this guide, we break down everything you need to know about these two deposit accounts, from interest rates to withdrawal rules.
What Is a Savings Account?
A savings account is a simple bank account that earns interest. Expect to see rates between 0.01% to 0.07% at traditional banks. High-yield online savings accounts may earn between 0.3% to 0.8%.
You can use a savings account to achieve different financial goals, like creating an emergency fund or saving for a home.
The best savings accounts feature higher rates and no monthly service fees. They also offer low or no minimum balance requirements.
Interest Rate
The average annual percentage yield (APY) for traditional savings accounts is about 0.06%. High-yield savings accounts offer APYs between 0.5% and 0.8%.
The APY is how much interest you earn on your money each year.
A $5,000 account balance with a 0.05% APY earns $2.50 a year.
A $5,000 account balance with a 0.5% APY earns $25 a year.
A $5,000 account balance with a 1.5% APY earns $75 a year.
Accounts offering higher interest rates tend to have higher opening balance requirements. You may need to keep that high balance if you want to avoid paying a fee or earn a higher APY.
Withdrawals and Access to Cash
Every savings account lets you make deposits and withdrawals.
However, a savings account doesn’t provide a separate checkbook to access your money.
That’s likely not a big deal. But it might be if you’re a small business owner or simply prefer to write checks.
The only way to withdraw cash from a savings account is via online transfers or in-person withdrawals at your bank.
You can also use your checking account’s debit card to withdraw money from your savings account at ATMs, assuming the same institution administers both accounts.
Account Minimum and Initial Deposit Requirements
Most savings accounts don’t require much money to get started. As little as $1 to $100 is pretty standard at traditional banks.
Some online banks that offer high-yields require a bigger minimum deposit. Want to earn that 1% interest rate? You may need to make an initial deposit of $1,000 or more.
You may also need to keep a certain amount of cash in your account at all times after opening it to qualify for a particular interest rate or avoid a monthly maintenance fee.
However, this isn’t always the case. A growing number of digital banks, such as Ally Bank and Synchrony Bank, offer high-yield savings accounts with competitive rates and no minimum deposit requirements.
Want to go digital? Check out our review of the best online banks.
What Is a Money Market Account?
A money market account is an interest-bearing savings product.
It’s similar to a savings account but it usually comes with its own ATM card and check-writing privileges.
Money market accounts typically earn interest rates ranging between 0.01% to 0.75%. Rates often increase modestly with higher account balances.
You can open a money market deposit account at many banks and credit unions.
Don’t confuse this type of account with money market mutual funds. A money market fund is a type of income-oriented mutual fund that invests in short-term debt securities. A money market fund is a liquid investment and is not insured by the FDIC or NCUA.
Interest Rate
Money market accounts are often thought to earn higher interest rates than savings accounts, but that’s not always true.
At traditional banks, money market accounts can earn barely more than a traditional savings account: 0.03% to 0.09%.
At some online banks, you can find APYs as high as 0.4% to 0.75%.
Most money market accounts offer tiered APYs.
Typically, you’ll have a lower APY until you hit a certain amount in your account, at which point the APY increases.
Withdrawals and Access to Cash
A money market account can provide easier access to your money because you can write checks.
However, you may still be limited to a certain number of withdrawals per month, just like a savings account.
Account Minimum and Initial Deposit Requirements
Minimum initial deposits can be as low as $0 but may range between $500 and $5,000.
Traditional banks often let you get started with $0 down (but the interest rate is low).
On the flip side, some online banks require higher initial deposits (think $1,000 and up).
If a money market account’s APY seems too good to be true, check its minimum balance requirement. You may need to put down $2,500 or more in order to fetch a super stellar rate.
Then again, there’s a handful of online institutions that offer $0 down and a high interest rate.
It really just depends. Your best bet is to do some online research and look for the sweet spot between high rates and low minimum balances.
Ready to get started? Here’s how to open a savings account in a few easy steps.
How Are Money Market Accounts and Savings Accounts Similar?
You can find both of these interest-bearing accounts at nearly every traditional bank and credit union. Many online banks also offer these accounts, typically with higher interest rates.
Both savings accounts and money market accounts let you earn interest on your deposits — though Interest rates are modest.
Both accounts may also limit how many withdrawals you can make per month.
Prior to April 2020, financial institutions were required under federal law to limit customers to six deposit withdrawals per month. That rule — known as Regulation D — has been phased out, but some banks may still enforce it.
If you make more than six withdrawals per month at some institutions, you may face a fee or penalty.
Both accounts may charge monthly maintenance fees. You want to avoid these at all costs. Most institutions will waive the monthly fee if you maintain a certain balance in your account or set up direct deposit.
Both money market and savings accounts offer $250,000 worth of deposit insurance. This helps protect your cash in case your bank or credit union fails or goes bankrupt.
For banks, insurance is provided by the Federal Deposit Insurance Corporation (FDIC).
Credit unions maintain their own federal deposit insurance through the National Credit Union Administration (NCUA), which also provides $250,000 of insurance for account holders.
How Are Money Market Accounts and Savings Accounts Different?
The biggest difference between the two is that money market accounts usually come with their own debit cards and/or checkbooks.
Unlike checking accounts though, a money market account isn’t intended for everyday purchases. It’s meant to help you save.
Money market deposit accounts also tend to earn more interest than regular savings accounts. However, rates for high-yield savings accounts and money market accounts have been pretty competitive in recent years, so it really comes down to the individual financial institution.
The final key difference is a money market account tends to carry higher balance requirements than a savings account.
You may also need more cash to open a money market account. Savings accounts, in contrast, are generally easier and less expensive to open.
Pros and Cons of Savings Accounts
Here are the upsides and downsides of using this type of account.
Pros
Earns interest.
Deposits insured by the FDIC or NCUA.
Easy to open.
Minimum deposit and balance requirements are usually low.
Easily transfer money to linked checking accounts.
Cons
No separate checkbook.
Interest rates on traditional savings accounts are very low.
May be limited to a specific number of withdrawals per month.
You might be able to find higher rates with other savings products, like certificates of deposit (CDs).
Pros and Cons of Money Market Accounts
Here are a few things to consider before opening an account.
Pros
Earns interest.
Check writing abilities.
May come with its own ATM card.
Deposits insured by the FDIC or NCUA.
Cons
May have higher balance and initial deposit requirements.
May be limited to a specific number of withdrawals per month.
You might be able to find higher rates with other savings products, like certificates of deposit (CDs).
Money Market Account vs. Savings Account: Which Should You Use?
If you want to start saving money, you really can’t go wrong with either of these bank accounts.
But there are a few situations when picking one makes more sense than picking the other.
Whichever type of account you choose, make sure you know your liquidity needs and find a bank or credit union you can trust to help you reach your financial goals.
When a Savings Account Makes Sense
A savings account is ideal to save for short-term goals or to build an emergency fund. You won’t earn much interest at traditional banks, but the money is safe and accessible in case an unexpected expense arises.
If you’re just starting out, it also makes sense to go with a savings account. They are easy to open and usually don’t require as much money to get started. Some banks let you open a savings account with just $1.
A savings account also makes sense if you want one financial institution to handle all your banking needs. This can help simplify your financial situation by letting you manage your money in one place instead of across multiple accounts.
When A Money Market Account Makes Sense
A money market account makes sense if you want your cash to earn as much interest as possible.
It’s best to use one if you can make the initial deposit requirement, maintain a high minimum balance and want the flexibility to write a few checks per month.
A money market account can also make sense if you want to easily access funds. A money market ATM card or checkbook makes withdrawals convenient and accessible — though linking savings and checking accounts at the same bank makes withdrawals just as painless.
A money market account can be a good move if you’re saving for a medium-term goal. Because money market accounts often fetch a higher yield, you can earn a little extra interest on your cash without exposing it to the stock market or other risks.
Money Market vs. Savings Account: Bottom Line
Money market accounts and savings accounts used to be pretty different.
But as technology and finance merge — and consumers have more options in a competitive digital marketplace — these two accounts don’t look so different anymore. In fact, they’re really similar from a consumer perspective.
If your biggest concern is easy access to your money, open a savings account at the same place you have a checking account, assuming the rates and terms are favorable.
If your top priority is getting the highest interest rate possible — a long-time draw of money market accounts — you probably won’t find it at your local bank.
Do some research on online money market accounts from insured institutions. Compare interest rates, initial deposit requirements, fees (if any) and other account requirements.
You want to find:
The highest interest rate.
An initial deposit you’re comfortable with.
A minimum balance you’re confident you can maintain.
Check out online high-yield savings accounts as well. Nowadays, they’re very similar to online money market accounts.
Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.