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Strategies to Save

Savings Account vs Money Market Account

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Male hand putting coin into a piggy bank

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.

Interest Rates

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.

FDIC Insurance

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.

In Conclusion

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.

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Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at [email protected]

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Strategies to Save

How to Save Money Using the 20% Savings Rule

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

You can find a lot of conflicting financial advice out there, but one recommendation that is rarely disputed is that you need to save money for the future. A strong savings game – including a savings account, an emergency fund and a retirement account – is a basic requirement for good personal financial health.

Understanding that you should build your savings is step one. Step two is knowing how much to save. That’s where the 20% savings rule comes in. This rule is part of the 50/30/20 budgeting method, popularized in a 2006 book by U.S. Senator Elizabeth Warren and her daughter Amelia Warren Tyagi, titled “All Your Worth: The Ultimate Lifetime Money Plan”.

Read on to learn more about the 20% savings rule and how it can help you save more.

What is the 20% savings rule?

The 50/30/20 budget recommends you divide your after-tax income in three broad categories:

  • 20% for savings: This includes savings for both near-term goals and your long-term financial security. Money in this category should be saved in an emergency fund, a high-yield savings account, and retirement accounts.
  • 30% for wants: Spending for things that are nice to have, but not strictly necessary. Money in this category is for entertainment, dining out, vacations, or a gym membership.
  • 50% for needs: Money in this category is for required monthly expenses like rent or mortgage payments, utilities, insurance, groceries and transportation.

Stephen Caplan, a financial advisor with Neponset Valley Financial Partners, a wealth management firm in the Boston area, said the 20% savings rule makes a lot of sense, especially for young people, because it helps safeguard against lifestyle inflation.

“The beauty of maintaining a 20% savings rate is that as you progress in your career and increase your earnings, you are able to live a nicer lifestyle and direct more money toward your future financial goals,” Caplan said. “If you focus on saving a specific dollar amount, rather than a percentage of your income, it’s easy to frivolously spend additional income.”

How to maximize the 20% savings rule

What makes the 20% savings rule work? It’s simple, flexible, and it can help you save more in the long run. Here’s how to make it work for you.

Set a budget

While other budgeting methods rely on detailed categories and strict dollar amounts, the 20% savings rule lets you allocate a percentage of your income to a variety of savings methods and accounts. This can be especially helpful if your income fluctuates from month to month. In months when you earn more, you can save more. If you earn less, you save less.

Start by calculating your after-tax income. This is the amount you have available to spend each month after taxes have been withheld from your paycheck or set aside for quarterly estimated payments if you are self-employed. If your employer withholds retirement contributions or insurance premiums, add them back in to reach your after-tax income. Now, multiply that number by 20%. Ideally, that’s how much you’ll put aside to savings each month.

Establish an emergency fund

Having an emergency fund is an essential component of long-term financial success as it prevents life’s curveballs, such as job loss, medical bills or unexpected home repairs, from sending you into debt.

Most financial experts recommend building an emergency fund equal to three-to-six months of expenses. If you don’t have this much saved yet, allocate a chunk of your 20% savings to establishing an emergency fund.

Focus on fixed costs

If you have trouble allocating 20% of your income to savings, Caplan recommends taking a hard look at the needs category before cutting wants.

“Too many people focus on trying to cut back the 30% discretionary spending category and ignore the big purchases in the 50% category,” Caplan said. “These expenses are usually fixed costs, such as mortgage, rent, and car payments, so getting them right from the start can have a significant impact on your financial well-being.”

Maybe you are spending more than you can afford on housing. It’s not simple to find a new apartment or sell a home, but over the long term paying less in rent or downsizing your mortgage could yield major savings. That new SUV may have felt great during the test drive, however it may be possible to reduce your monthly car payments by finding a more modest sedan. Again, downsizing could help rightsize your budget.

Get out of debt

Another unique aspect of the 50/30/20 rule is how it treats debt payments. Mortgage payments and minimum payments towards other debts, such as student loans and credit cards, are categorized as needs. After all, you need to pay at least this much every month to keep your home, avoid defaulting and preserve your credit score.

However, any additional payments made to reduce the principal balance of your debts are considered savings because once you’re out of debt, you can redirect those payments to savings.

If you have non-mortgage debt, after establishing an emergency fund, allocate a portion of your 20% savings to getting out of debt. The sooner you pay it off, the more you’ll have for long-term saving and investing.

Save for retirement

If you have access to a retirement plan through work and your employer offers matching contributions, you can boost your retirement savings without allocating more than 20% of your income to savings.

Contribute at least up to the percentage your employer matches. When your employer matches your contribution, it’s free money for you.

Create an automated savings plan

Too often, people make the mistake of saving only what is left over after covering their needs and wants. You can avoid this by automating your savings. Most banks will allow you to set up an automatic draft from your checking account into savings, or your employer may be able to have a portion of your paycheck direct deposited into savings.

When you automate your savings, you’ll save time, make it easier to commit to paying yourself first and reduce the temptation to spend what you should be saving.

Is 20% the right amount for you?

The 20% savings rule is simple and flexible, but it’s not for everyone. If you’re living paycheck-to-paycheck, just covering the necessities or facing other financial difficulties such as job loss or debt, you might need to work on increasing your income before you prioritize saving.

Caplan also noted the 50/30/20 rule might be a challenge for people residing in cities with high cost of living like San Francisco, New York, Los Angeles, and even Boston. “You’ll earn more in these cities,” Caplan said, “but housing costs a disproportionate amount of your income. This makes it challenging to keep your fixed costs under 50% of your income.”

If allocating 20% of your income to savings just isn’t feasible, start with a lesser amount, such as 15% or even 5%. The most important thing is to start saving. Eventually, as your circumstances change and you pay off debt, you can get closer to the 20% rule of thumb.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Janet Berry-Johnson
Janet Berry-Johnson |

Janet Berry-Johnson is a writer at MagnifyMoney. You can email Janet here

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Strategies to Save

Understanding the 50/30/20 Rule to Help You Save More

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Budgeting is tough. Not having enough money to cover your monthly expenses can leave you scrambling to dip into your emergency fund or relying on a credit card.

If you are looking for another way to manage your finances, you could consider percentage-based budgeting, which relies on a percentage of your income to determine your spending limitations. In a month where you earn more, you’ll have more to spend across your categories.

One approach is the 50/30/20 rule. This budgeting method was popularized in “All Your Worth: The Ultimate Lifetime Money Plan,” the 2006 book by U.S. Sen. (and current presidential candidate) Elizabeth Warren and her daughter Amelia Warren Tyagi.

Read on to learn more about the 50/30/20 rule, how to use it and why it might be the key to helping you save more.

What is the 50/30/20 rule?

The 50/30/20 rule states that you should budget your income in three categories: needs, wants and savings. It starts with your after-tax income. This is the amount you have available to spend each month after taxes have been withheld by your employer or set aside for quarterly estimated payments if you are self-employed.

If you receive a paycheck and your employer withholds retirement contributions or insurance premiums, add them back in to get to your after-tax income. Once you’ve determined your monthly income, you’ll budget it as follows:

  • Budget 50% toward your needs: These are required monthly expenses, such as your rent or mortgage payment, utilities, insurance, groceries and transportation.
  • Budget 30% toward your wants: This is the fun stuff, such as dining out, entertainment and the barre class you take on Saturday mornings.
  • Budget 20% toward your savings: This is for your financial security and long-term goals, such as creating an emergency fund or saving for retirement. This also includes vacations or home improvements.

Todd Murphy, a financial advisor with Prime Financial Services in Wilton, Conn., recommended direct depositing your paychecks into multiple bank accounts: 50% to checking for needs, 30% to a different account for wants and the remaining 20% to retirement and savings accounts.

“The most successful clients have separate banks for these accounts to limit the tendency to talk themselves into making ‘exceptions’ on their spending,” Murphy said.

An important note: If you’re working to pay off non-mortgage debts, such as student loans and credit card payments, you might wonder where those fit. Payments towards these debts fall into two categories:

  • The minimum payments required by your student loan or credit card company are needs. You need to pay at least this much every month to avoid default and harm to your credit score.
  • Any additional payments made to pay off the balance faster and get out of debt are savings. Why? Because once you’re out of debt, you can redirect those payments to saving and investing.

How to use the 50/30/20 rule

To show you how the 50/30/20 rule works in the real world, let’s consider a hypothetical example. Miguel’s take-home pay from his full-time job after taxes is $3,900 a month, and his employer withholds $200 a month for health insurance. Here is how Miguel might budget using the 50/30/20 rule.

Step 1: Calculate after-tax income

Since Miguel’s employer withholds $200 a month for health insurance, Miguel adds that amount back to his take-home pay to determine his income of $4,100.

Step 2: Cap needs at 50%

Now that Miguel knows his monthly after-tax income, he needs to think about his needs — what he spends each month on housing, utilities, insurance, groceries and the car that gets him to and from work.

According to the 50/30/20 rule, these costs should take up no more than 50% of his $4,100 income, or $2,050.

Miguel’s costs in this category are as follows:

Step 3: Limit wants to 30%

According to the 50/30/20 rule, Miguel has $1,230 to put toward his wants. That number may seem like a lot to some people, but limiting wants to 30% of income can be difficult.

Miguel has a Netflix subscription, stops for coffee every morning and likes to meet up with friends once a week for drinks. He also likes to take his girlfriend out to nice dinners a couple of times a week and tinker on his vintage motorcycle. Spending on all of those interests adds up.

Step 4: Restrict savings to 20%

The rest of your income should be set aside for emergency savings, putting money toward retirement, saving for future goals and getting out of debt.

According to the 50/30/20 rule, Miguel has $820 for the saving category. Let’s assume that Miguel already has an emergency fund, so he wants to prioritize retirement, paying off debt and saving for an engagement ring. His spending in this category might look like this:

How the 50/30/20 rule can save you more

The great thing about the 50/30/20 rule is it gives you a guideline for living within your means so you can save more.

Make adjustments

The 50/30/20 rule could open your eyes to changes you need to make. For example, if you run the numbers and realize housing takes up nearly 50% of your income, leaving little room for other necessities, you might decide to relocate to a less expensive neighborhood. Or you could look for other ways to reduce spending in the needs categories by shopping for new insurance or clipping coupons when you go grocery shopping.

Reduce your wants

If you’re overspending in the wants category, you may need to change up your daily habits: make coffee at home instead of buying it, cook at home more often or reconsider expensive hobbies. Small changes can add up to big savings over time.

Get a retirement bonus

If you have access to an employer-sponsored retirement plan, you may be able to get a boost to your savings without touching the other categories.

“Contribute up to the percentage your employer matches into your 401(k) or 403(b),” Murphy said. You’ll receive an automatic bonus when your employer matches your contribution.

Put more money into savings

Savings is an essential part of any budget because, without it, unforeseen expenses can leave you struggling to pay necessary costs of living or get you into debt. If you run the numbers and realize you’re not saving enough, look for ways to trim expenses in the needs and wants categories.

Pay off debt faster

Knowing you have 20% of your income to dedicate toward savings and paying off debt can motivate you to pay more than the monthly minimum and make a bigger dent in your balance.

After setting up your emergency fund, prioritize paying off debts. The sooner you pay off any credit cards, student loans and car loans, the more you’ll have to invest and save for retirement.

Is the 50/30/20 rule right for you?

As long as you have income left over after covering your needs, the 50/30/20 rule can work for you. However, if you run the numbers and realize a 50/30/20 split just isn’t feasible right now, don’t give up. Maybe your categories look more like 60/30/10 right now. That’s OK. Start where you are and look for changes you can make to reduce your cost of living, change your spending habits and get closer to a balanced budget.

Bottom line

The 50/30/20 rule is far from the only way to budget, but it’s a simple formula that allows you to meet your wants and needs and save money without strict dollar amounts and inflexible budget categories.

Murphy acknowledged this method might not work if you are experiencing financial difficulties, such as being laid off from your job. In that case, you may need to work on increasing your monthly income to cover your needs before allocating money to wants.

“Greater savings allows for more flexibility,” Murphy said. “If you live on less than half of your income, you are likely to never have a personal recession, regardless of the economy.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Janet Berry-Johnson
Janet Berry-Johnson |

Janet Berry-Johnson is a writer at MagnifyMoney. You can email Janet here

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