Money Market vs Savings Accounts: What You Need to Know

Here are the basic characteristics of money market and savings accounts:

• Money market account: An FDIC-insured deposit account that earns interest, usually higher than a standard bank savings account. It includes ATM access and lets you write checks. The bank invests your money in regulated funds but the bank, not you, takes the risk – your account value won’t decrease.
• Money market mutual fund: An uninsured investment that earns interest at a rate determined by the interest rates of the underlying assets in the fund, which are, in turn, based on inflation and Federal Reserve rates. With this type of account, you’re investing your money in the market – your money can decrease in value based on market conditions.
• Savings account: An insured deposit account that earns interest, usually very low. Savings accounts usually have ATM access but cannot be used to write checks. Your savings won’t decrease in value – unless you make a withdrawal.
• High yield savings account: An insured deposit account that usually earns interest at a rate far above a standard savings account. High yield savings accounts are generally online accounts with slightly limited access to your money – you can’t write checks and ATM access varies depending on the provider. But your savings are safe from loss.

Key Differences Between Money Market and Savings Accounts

* Money market funds are compared based on the seven-day yield, not APY. The average seven-day yield was around 0.01% in January 2022.³

Digging deeper, a money market account, sometimes called a money market deposit account, usually pays a higher interest rate than a standard savings account – despite a national average of 0.07% APY, money market account APYs have reached as high as 0.50% in early 2022.

 
Money market accounts typically require a minimum deposit, which can range from the low hundreds to thousands of dollars. Depending on the provider, they also may offer check-writing and debit-cards. With a money market account, the bank or credit union can use the funds for safe and regulated investments, which helps generate the higher interest rates. Often, you need to maintain a minimum balance to earn the higher interest rate, and your rate may fluctuate with the economy.

 
Money market accounts can be a good option when saving for medium-term goals.

The advantages of money market accounts generally come down to higher interest rates than savings accounts with good liquidity, which means quick-and-easy access to your savings. But like savings accounts, money market accounts come with a withdrawal limit, usually six transactions per month unless made at an ATM or a teller’s window. While the Fed’s changes to Regulation D relaxed withdrawal limit rules in 2020,⁴ it doesn’t require banks to change so it’s a good idea to consult with your financial institution on any specific restrictions.

Money market accounts are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) at banks and the National Credit Union Administration (NCUA) at credit unions, so you won’t lose your money on the rare occasion a financial institution goes out of business. If your account balance exceeds $250,000, you can consider opening multiple accounts in different ownership categories – single vs jointly owned, for example – or at different institutions, since depositor insurance is applied per account/ownership category/bank.

A money market mutual fund, often shortened to money market fund, is a type of mutual fund that invests your money in short-term debt securities, cash, and cash equivalents. Experts consider a money market fund as a low-risk investment option. They differ from money market accounts in that a money manager invests in high quality debt using your money rather than the bank’s. As such, the original amount of money you deposit into your money market fund is not guaranteed like it is with money market accounts and savings accounts. Changes in the market may affect your money in either direction. Money market funds do not include FDIC and NCUA insurance. You can think of a money market fund as an investment product and a money market account as a bank product.

Standard savings accounts and high yield savings accounts help people safely put aside money for their future while earning interest. Both include FDIC or NCUA insurance. As with money market accounts, six withdrawals are permitted per month unless you make them in person at an ATM or a teller window – but the same Fed Regulation D relaxation rules apply, so actual limits may vary by institution. High yield savings accounts offer better interest rates.

 
Both these savings accounts differ from money market accounts and funds in that they are not typically invested in the market by the financial institution. Instead, the institution usually uses the money to fund its own lending operations.

With all these savings and investment approaches, your rate of return usually varies with market conditions, except when guaranteed or special introductory rates are offered. The annual percentage yield (APY) tends to follow the Fed’s lead: When the Fed increases its benchmark interest rate, the APYs tend to increase. And when the Fed cuts its rate, those same APYs tend to decrease. Remember that money market funds use the seven-day yield instead of APY, the industry standard for assessing money market fund returns. The seven-day yield considers fund distributions, appreciation, and average fees over a seven-day period, and assumes this average will remain over an entire year.

Both money market accounts and savings accounts help keep your money secure and earn interest to help you reach your financial goals. Your rate of return often will vary based on the type of account and market conditions.