There are many types of accounts available for storing and transacting with money. The two most popular options are savings accounts and money market accounts.
Both gain interest over time, meaning you have added value in using them. However, some differences may lead you to choose one over the other.
Let’s look at the similarities and differences of both. Learning about what they bring to the table and their potential disadvantages can lead you to an informed decision.
It’s all about your goals and the features that each one has that support your goals.
What Is a Money Market Account?
A money market account is a hybrid between a savings and checking account. It gains interest over time and has insurance from the Federal Deposit Insurance Corporation (FDIC).
You can only open these accounts in institutions with this support, though most banks have them.
When the bank goes under, the FDIC will cover the losses and return the money to its account holders.
Backing from the federal government acts as confidence and assurance to open accounts there. However, these institutions may require a minimum deposit and balance to keep the service open.
A money market account is different from a money market fund. The former is for banking, while the latter is for investment purposes.
The investment type has no backing or insurance from a federal agency.
When it comes to accessing funds in a money market account, a money market account has the same accessibility as a checking account. You can connect it to:
- Debit cards
- ATMs
- Electronic or digital payments
- Checks
- Other methods depend on the financial institution
The Advantages of a Money Market Account
Money market accounts are appealing because they come with insurance. You won’t have to worry about the bank going under and you losing your money.
Federal backing brings confidence, and the government benefits from the support of a financial entity. Here are some other reasons you’d want to open a money market account:
- Perks: The ability to transfer money, fast processing, and zero fees can be reasons to choose money market accounts. It all depends on what that institution is offering.
- Accessibility: Accessing your account through checks and debit cards is always convenient.
- Interest rates: Depending on the offered interest rate, you may see significant gains in your account over time.
The Disadvantages of a Money Market Account
One of the most notable disadvantages of a money market account is its minimum requirements. You’ll have to ensure that the bank always has a set amount. If not, it will require a fee.
An institution may decide to close the account. Maintaining a balance can also be a reason for the bank to remove and reduce perks.
We’ve seen how some banks can decrease bonuses or interest rates because clients don't follow their minimum. It’s best to know the requirements for these accounts first before applying.
Some may even have promotions where they don’t have minimum requirements.
Money market accounts are also more fluid than other accounts. Their interest rates can change depending on the current financial scenario.
You’ll find that the rate you signed up for today may not be the same the following year. The rates fluctuate, which can be both a good or bad thing depending on the market.
Why Should I Open a Money Market Account?
The money market account makes the most sense when you want access to your money whenever necessary. For example, if you want the ability to write checks but not to the point that a checking account is justifiable.
One of the main appeals of a money market account is that you can save money while still being able to make transactions — all in one place. You won’t have to spend time transferring money from one account to another, like with a savings account.
The consensus is that money market accounts earn more money than average. They work best if you’re saving for something for only a few years.
The higher yield will help while still providing liquidity if you need money fast. There are no penalties for withdrawing from the account.
What Is a Savings Account?
Banks designed the savings account to hold money over long periods. While in the account, your money gains interest.
It’s a great way to hold money if you’re planning for something long-term, like a vacation or emergency money.
Like the money market account, savings accounts also have insurance from the FDIC. The insurance comes from the National Credit Union Administration (NCUA) if it's a credit union.
The difference that savings accounts have over others is their ability to move money. Since it is for long-term holding, accessing it isn’t as easy as a money market account.
“A penny saved is a penny earned” - Benjamin Franklin
You can access the account through a mobile or online app. It’s also possible to move money to others and deposit it directly into the savings account.
However, the primary way to move money is through checks or visiting the bank itself.
People often have two accounts:
- A savings account to hold cash.
- A checking or money market account for liquid funds.
Savings accounts also have a limit when it comes to transacting from them directly. Depending on your bank, you will have three, six, or sometimes more monthly withdrawal limits. Withdrawing more than the allotted number will lead to fees.
It all depends on the preference of the financial institution.
You’ll need to check with your local institution to confirm this number. It can help you plan any movements you need for the month.
The Advantages of a Savings Account
Financial institutions promote savings accounts a lot because they help the bank run operations. This type of account also has some distinct advantages because of its perks.
The biggest one is the interest rate on deposits. Most institutions offer interest each time you place money in the account, no matter how small.
If you’re building a large fund, every little bit helps.
Other than that, there are other advantages you may want to consider. These include:
- Federal insurance: Like the money market account, you’ll have insurance from the federal government. There is a limit set by law, as is with any insurance.
- Easy to open: It’s easy to start a savings account with banks or a credit union. You can visit the institution to start, while others offer mobile and phone options. You can open an account in as little as ten minutes.
The Disadvantages of a Savings Account
The biggest downside a savings account has is its transaction limit. If you only have it as your account, you’ll have to make the most of the limited withdrawals per statement cycle.
If you go over it, you can incur fees, or the bank may block the transaction entirely. There are also other things to consider, such as:
- Fees: You might be in for a surprise once you see your account start to shed small amounts regularly. There are fees associated with maintaining and using your savings account. Make sure to read the fine print and ask the bank about additional fees before opening an account.
- Variable interest rates: Like money market accounts, savings accounts may change their rates. Even if you choose one with high interest, it may not stay the same permanently. Some accounts offer fixed rates but are generally lower than variable rates.
Why Should I Open a Savings Account?
A savings account works best if you want to store money and keep the temptation to spend it far from you. Many people use them for emergency funds or as a way to set aside money for a future purchase.
For example, a savings account can work wonders in helping you reach your goals if you're saving for a house deposit.
Savings accounts also work well for short-term goals. If you’re saving money for a vacation, you won’t earn much interest, but it keeps your money safe until the scheduled date.
The Difference Between Money Market Accounts and Savings Accounts
The noticeable difference between the money market and savings accounts is their accessibility. Both earn interest and have insurance from the FDIC.
The notable change is that the money market has ATM and debit card access. Some savings accounts have ATM access though it depends on the institution.
The reason is the same as above. Savings accounts hold money long-term, so withdrawals are limited. If you want to open one, the question you need to answer first is: what is your goal?
If you’re looking for continuous easy access to money, then a money market account may serve you better. On the other hand, a savings account can be in your favor if you're saving for something significant and don’t want to make frequent withdrawals.
Apart from that, another detail you may need to look at is their interest rate. Some claim that money market accounts have better yields, while others attest to savings accounts.
The truth is that it varies from institution to institution. Some money market accounts have higher rates, but they vary depending on the institution.
There are also classifications for these accounts. For example, you’ve often heard of high-yield savings accounts with higher interest rates.
What do you do in this scenario? You’ll need to shop around and find the best deal possible.
Choosing one depends on preference, so you want to keep your options open. After all, people may choose to open an account with an institution because of the following reasons:
- Accessibility
- Online/digital/mobile banking capability
- Better rates
- Desirable loans
- Rewards
- Other features
Why Open an Account?
Opening a money market or a savings account is low risk. The upside is higher than the possible disadvantages.
However, because it is low risk, the potential for returns is also lower. The rates also aren’t enough to justify fighting inflation.
You may not feel the interest rates even if you’ve used the account for some time. You'll only feel a significant bump when you have a large amount stored in the bank over time.
Interest does compound within these accounts, so they could be a way to earn a little more using your emergency fund or something similar.
The FDIC also impacts the interest rates provided by these accounts. If they want to stimulate the economy, it often ripples to their supported banks, leading to lower interest.
That is the point, as these accounts aren’t investment vehicles. If you want your money to grow, it’s better to look at other options.
They pose a higher risk but also the potential for more rewards.
You want to open savings and money market accounts to store money or transact with them, respectively.
The Financial Institution Makes All the Difference
Your experience may differ depending on the institution you approach. The recommendation is to check several as rates can vary significantly between each.
You’ll also want to find a reputable bank that has transparency and understands your concerns.
To that end, having a company like 121 Financial Credit Union can be beneficial. Unlike traditional institutions, we prioritize our members’ financial well-being.
When you join us, you become part of the family. We’ll help you reach your goals by advising you on the best moves to make considering your situation. Become a member today.