Many of our readers have asked us to explain the difference between a money market account and a savings account. Here are some of the most common questions:
- Are money market interest rates higher than savings account interest rates?
- Do money market accounts have a higher minimum deposit requirement?
- Am I able to write checks, use an ATM card and have greater access to a money market account, compared to a savings account?
- Are both money market and savings accounts FDIC insured?
- How do banks use my money in each type of account?
We will answer all of these below. But if you just want the simple answer, here it is: there is virtually no difference between the two account types (with the exception of a money market fund, see below). Use a money market deposit account or a savings account for your emergency savings. They are both FDIC insured, up to $250,000 per institution, per individual. You should choose the account with the highest interest rate, and can shop for the best deal here.
Important Note: There is a difference between a money market deposit account, which is insured by the FDIC and offered by banks, and money market funds, which are offered by brokerages and are not FDIC insured. We don’t know why anyone would chose a money market fund.
Historically, money market accounts offered much higher interest rates than traditional savings accounts. However, after the 2008 financial crisis, the difference between savings accounts and money market accounts has narrowed. In many cases, you can now earn a higher interest rate with a traditional savings account. And we have yet to find a money market deposit account that beats the best interest rate paid by the leading internet-only banks.
We will show the difference between the savings accounts and money market accounts at a large bank (Bank of America), a large brokerage (Fidelity) and a leading internet-only bank (Ally).
The rates below are as of the publishing date, and you can find the rates updated daily here.
- Bank of America pays 0.01% on a savings account and 0.03% on a money market deposit account
- Fidelity pays 0.01% on money swept to an FDIC savings account and 0.01% on money market funds
As you can see, the difference between the savings account rates and money market rates are not as dramatic as they used to be. Even money market funds, offered by brokerages, do not offer higher returns even though they are not FDIC insured. There is no reason to sign up for a money market fund.
Minimum Deposit Requirement
Money market accounts used to pay higher interest rates (no longer), and in return they required higher minimum balance requirements. However, the best accounts no longer have any minimum requirements.
Ally Bank does not require a minimum amount to open a money market account. They do not have a monthly fee, and they do not have a minimum monthly balance. This is the same in both the money market account and the savings account.
Bank of America is stingier. For both the savings account and the money market they require $25 to open the account. And, on the money market you will be charged $12 per month if you fail to have at least $2,500 in your account. The savings account can be completely free (with no minimum balance) if you link it to a savings account. However, given that they only pay between 0.01% and 0.03% interest, we don’t know why anyone would open their accounts.
At Fidelity, any cash not invested is automatically swept into their deposit relationships with banks. They will place the money in banks, making sure that they keep the total balance below the $250,000 investment threshold. This money is effectively kept in savings accounts of large banks (the first on the list is Wells Fargo).
A money market fund typically requires a minimum amount to open. For example, the Government Money Market Fund, which pays 0.01% (like all of the money market funds) requires a shocking $25,000 to open the account. Remember: these accounts are not FDIC insured and have some of the lowest interest rates out there. We think this is a bad option.
If you are looking to invest, brokerages like Fidelity can be great options. However, you should never keep your cash allocation sitting in a brokerage account. The best options available are with internet-only banks like Ally.
Check Writing and ATM Card Usage
Both savings accounts and money market deposit accounts have restrictions on how often you can take out money. You are limited to 6 transactions per month of the following types of transactions:
- Point of sale transactions (using a debit card)
- Online and mobile banking transfers
- Overdraft transfers
If you exceed 6 transfers, you will likely be charged for each additional transfer. If you exceed too many times, or too frequently, your account could be closed by the bank.
Some banks now give you more access to your money market account than your savings account. Ally Bank, for example, gives you unlimited ATM withdrawals from your money market account. That is why they give you a lower interest rate than a savings account, because you have a greater ability to take money out of the account.
Before the Great Recession of 2008, money market accounts were not insured. But most people thought they were insured.
When the whole world started panicking, the money market industry came under threat. So, to make sure the entire banking system did not collapse, the FDIC started insuring money market deposit accounts in addition to money market savings accounts.
But remember: money market funds are like mutual funds, and are not insured.
The insurance covers you up to $250,000 per individual, per bank.
How do Banks Use the Money?
With a savings account, you are giving money to the bank to lend. They have to keep some of your money as a reserve (typically 10% of a deposit from a consumer), and the rest can be used for loans. So, your deposit could be used for credit card lending, loans to corporates, mortgage warehouse credit facilities and more.
With a money market fund, the bank is typically buying short-term (often overnight) commercial paper in the “money market” (hence the name). For example, a big company like General Electric often borrows overnight money. This could be used for a wide variety of general operating purposes. Banks will lend this money overnight. The credit risk is incredibly low, because the chance of General Electric going bankrupt tomorrow is very low. But the bank is paid something. They keep a portion of the return, and give the rest to you in the form of an interest rate.
In money market funds, investment can be varied. The fund could invest in government securities or overnight lending to businesses. The common theme in both money market deposit accounts and money market funds is that these are typically very short term loans. If you lend money for a short period of time, you get a lower interest rate, but you also take less risk.
You will never get rich putting your money into money market deposit accounts, money market funds, or savings accounts. To invest in your future, you should be investing in index funds like Vanguard.
However, we all have cash requirements. Our emergency fund is one example. The cash allocation of a retirement fund is another example. In order to find the best interest rate, you should look for the highest FDIC insured rate or either a savings account or a money market deposit account.
Right now, the best deals are found with internet-only savings accounts – and not money market accounts. You can find the best deals, updated daily, here.