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Updated on Tuesday, February 4, 2020
Money market accounts and savings accounts are deposit accounts that let you stash your cash and earn interest for the long term. Both types of account give a secure place to keep your money while also providing you easy access to your funds in case of financial emergency. Many money market and savings accounts offer decent rates of interest, which lets you grow your funds over time. Here’s a breakdown of the difference between money market and savings accounts.
What is a savings account?
A savings account is a deposit account that holds the money you need to save up for your financial goals. While your checking account is for everyday transactions, savings accounts are used to help you set aside funds for the long term, including retirement, education or an emergency fund.
Credit unions, banks and online financial institutions offer traditional savings accounts with varying service fees, interest rates and minimum account requirements. These are the features you can expect from savings accounts:
- Interest: Traditional savings accounts tend to have lower interest rates: The average savings account from a brick-and-mortar bank pays 0.27% APY, while the average credit union savings account pays 0.25% APY. If you choose to bank online, you may be able to earn 1.70% APY or more.
- Account minimums: Most savings accounts require no or very low minimum account balances, and allow you to save as much as you want. Generally, savings accounts with higher interest rates tend to have somewhat higher minimum balance requirements.
- Insurance: Savings accounts at conventional banks and credit unions are insured up to the legal limit per account, per bank by the Federal Deposit Insurance Corp. (FDIC) and the National Credit Union Association (NCUA), respectively.
- Service fees: Some savings accounts charge monthly service fees to maintain the account. Online banks tend to have lower fees, or even no fees at all. We always recommend that our readers avoid savings accounts with monthly service fees, since they are easy to avoid.
- Accessibility: Some savings accounts provide a debit card or checks to give you easy access to your funds.
- Transaction limits: No matter how easy it is to access money kept in a savings account, Federal Reserve Regulation D mandates certain types of telephone and electronic withdrawals, including transfers from savings accounts up to 6 per statement cycle. If you exceed this limit, your bank or credit union may charge you a fee, convert the account to a checking account or even close it.
What is a money market account?
Money markets accounts are high-yield deposit accounts that allow you to earn interest, but often carry higher minimum balance requirements than savings accounts. They allow you to deposit funds and earn interest on your account balance.
Money market accounts are sometimes confused with money market funds. The key difference is that money market accounts are risk-free deposit accounts, while money market funds are investment products that come with risk. Here are some of the key characteristics you will find in money market accounts:
- Interest: Some money market accounts may have slightly higher interest rates than savings accounts.
- Account minimums: Institutions tend to have higher account minimums on money market accounts than what you’d see on savings accounts. However, keep in mind this may not always be the case with every money market account.
- Insurance: Banking institutions and credit union money market accounts are also insured up to the legal limit by the FDIC and NCUA.
- Service fees: Some money market accounts charge monthly service fees. Many of these may require a minimum balance to avoid these fees.
- Accessibility: Generally, money market accounts are more likely to come with checks or a debit card to access your funds. However, just like savings accounts, money market accounts are subject to Regulation D, which mandates certain types of telephone and electronic withdrawals, including transfers from savings accounts up to 6 per statement cycle.
What’s the difference between a savings account and a money market account?
The two main differences between savings accounts and money market accounts are interest rates and minimum balances.
Money market accounts typically have higher interest rates
While the rates with money market and savings accounts can sometimes average out to be the same, money markets can still often offer higher rates. That is usually because money market accounts can require larger deposit amounts.
As stated above, you can see the difference when you compare rates with savings accounts from brick-and-mortar banks, which can average 0.27% APY and online savings accounts that average 1.70% APY or above. But, when you compare online banks, the interest rates for savings and money market accounts are very similar. For example, Marcus by Goldman Sachs® offers 0.50% APY with its online savings account, just below the 2.00% APY offered by Capital One’s 360 Money Market account for balances greater than $10,000.
However, when you look at VirtualBank, an online banking institution, you’ll find it offers a fixed rate for its eMoney Market account. With it, Virtual Bank offers a 0.35% APY for the first year. While this may not be the best interest rate on the market, it’s higher than what you may see with brick-and-mortar financial institutions.
Savings accounts have lower minimum balance requirements
When you open a savings account or money market, you will most likely need to deposit a minimum amount of money. Each bank and credit union has requirements, but savings accounts usually have a lower minimum than most money markets. Some savings accounts don’t even require you to deposit a certain amount of money when you open an account.
For example, My Savings Direct doesn’t require a minimum deposit amount to put your money into one of its savings accounts. But MutualOne Bank requires at least $500 to be deposited for a savings account, while Citizens Access requires $5,000.
Money markets usually require a minimum deposit that can range from institution to institution, but they often tend to be higher than with a savings account. Also, to get your best rate with a money market account, you’ll usually need to have a certain amount of money in your account.
As you may remember, Capital One 360 Money Market provides a high rate of 2.00% APY. While it doesn’t require a minimum deposit when you open an account, you will not get the 2.00% APY until you have at least $10,000 in your account — anything below that will receive 0.85% APY.
When should you choose a savings account?
Savings accounts are ideal for short-term savings goals. If you have a savings goal you want to achieve in the next few years, you may want to consider opening a savings account. Because you’re limited to a few transactions per month, you may be encouraged to keep your money in savings as opposed to spending it.
Another good use for a savings account is to hold your emergency fund. If you encounter a financial emergency, you then have fast access to your cash. Since you can easily access your funds with a savings account, you can tap into them if an incident occurs.
When should you choose a money market account?
Since money market accounts tend to earn higher interest than savings accounts, they may be a good solution for achieving mid to long-term goals. For example, if you’re saving for a down payment on a home, you may see higher rates than keeping your money in a savings account or checking account.
However, it’s important to note that to receive some of the higher interest rates, you may have to meet a higher account minimum requirement. Usually, money market accounts have a higher minimums to avoid service fees and help account holders earn a higher interest rate. So, if you can meet the higher account balance requirement, you may be able to reap the benefits of an interest rate that’s higher than what traditional savings accounts offer.
Where to find a money market or savings account
Visit MagnifyMoney’s savings account marketplace to help get started on finding a money market account or a savings account. Begin by adding your ZIP code, the amount of money you want to put into your account and the length of time you want to keep your money in that particular account. You’ll be able to compare the minimum deposit amounts and APYs on different accounts to find the best option for you.
Money market and savings accounts are both solid choices for when you want to open a deposit account to put your money away. But there are some pros and cons of both accounts to take into consideration. It’s essential to do your homework on both to see which works best for your financial needs. Once you decide which account you want to open, take your time to shop around for your best rates and inquire about all fees.