Money Market vs Savings Accounts

Money market accounts and savings accounts are two common options for depositing money you want to earn interest on while maintaining liquidity. While they share similarities, key differences like interest rates, account features, and limitations exist. Understanding how money market and savings accounts compare and contrast helps determine which fits your financial priorities.

Savings Account Basics

Savings accounts provide an accessible place to store cash reserves and earn a small return:

• Interest rate determined by the bank – currently averages just 0.06% APY
• FDIC insured up to $250,000 in the event of bank failure
• Deposits and withdrawals can be made easily in-person, ATM, or electronically
• Limited to 6 electronic transactions per month by federal regulation
• No minimum balance requirements at most banks

Savings accounts offer basic, low risk savings capabilities with few restrictions.

Money Market Account Features

Money market accounts operate similar to savings accounts but add a few key enhancements:

• Higher interest rates based on variable market indexes – current averages 0.14% APY
• FDIC insured up to $250,000
• Check writing and debit card access at some banks
• Transactions limited to 6 electronic transfers per month
• Minimum balance around $1000 – $2500 often required

The liquidity and account features parallel savings accounts in many respects. But money market accounts earn higher yields.

Interest Rate Differences

The starkest difference between the two account types is the interest rate:

• Money market rates are currently around double typical savings account rate APYs.
• Savings rates are set by the bank’s discretion, fluctuating slightly based on Fed rates.
• Money market rates fluctuate more, tracking short-term Treasury bond yields.
• Rates on both account types have fallen significantly over the past decade as the Fed cut rates.

Money market accounts offer noticeably higher returns, especially when opening high yield accounts online.

Compounding Frequency Comparison

In addition to rate, compounding frequency impacts returns:

• Most savings accounts compound interest quarterly based on daily account balances.
• Some savings accounts offer monthly compounding for a small bump in effective annual yield.
• Money markets typically offer daily compounding, capitalizing on gaining interest on interest.
• A few online banks provide savings accounts with daily compounding.

Faster compounding through daily calculations earns marginally more over time.

Balance Impacts on Interest Earnings

Account balance sizes also influence returns:

• For basic savings, balance size has little impact. Rates are flat regardless of deposit size.
• Money markets frequently pay higher incremental tiered rates as account balances grow.
• For example, a money market may offer 0.1% APY up to $10,000, then 0.2% APY up to $25,000, and 0.3% APY over $25,000.

Bigger deposit amounts optimize money market account interest earnings.

Access and Availability Considerations

Convenience and liquidity differ moderately:

• Savings offer easy withdrawals through ATM, bank teller, electronic transfer, or checks in some cases. No limitations beyond 6 electronic transactions.
• Money markets permit check writing and debit card access at some banks for payments and withdrawals at merchants or ATMs.
• Both are limited by federal regulation to 6 electronic transfers per month.
• Money markets may require 1-3 days advance notice for electronic transfers above the limit per month. Savings do not.

Both provide robust access despite nominal restrictions. Money markets may have occasional small delays.

Initial Deposit and Balance Requirements

Money markets tend to have higher minimums:

• Savings accounts can be opened with as little as $5 or $25 initial deposit.
• Money market minimum to open ranges from $1000 – $10000 at most banks.
• Savings have no ongoing balance requirements. Dip below and no penalty occurs.
• Falling below the money market minimum results in a monthly service fee around $10-15 until minimum is restored.

While savings accounts have little to no minimum deposit requirements, money markets expect larger stable balances.

FDIC Insurance Protection

Both accounts provide the same FDIC coverage on deposits:

• Each depositor is insured up to $250,000 for combined account balances held at the institution.
• Joint account balances are insured separately up to $250,000 per co-owner.
• Insurance protects principal in the event of bank insolvency.

Ensure total balances including CDs stay under insurance limits when allocating savings.

When To Choose Money Market Over Savings

Key factors that make money markets favorable:

• You maintain consistent larger deposit balances exceeding savings rate tiers.
• You want debit card convenience and possibly check writing capabilities.
• You prioritize marginally higher yields over immediate access flexibility.
• You manage balances diligently and can meet higher minimum requirements.
• Your timeline for accessing funds exceeds FDIC limits requiring additional accounts.

For substantial savings, money markets provide optimal interest.

When To Prefer Savings Accounts

Circumstances where basic savings accounts may be better aligned:

• You want to open an account with minimal initial deposit.
• Your balances remain within FDIC coverage limits for a single account.
• You may dip below monthly minimum balance requirements frequently.
• You want to make frequent withdrawals with no limitations.
• You value liquidity and convenience over slightly higher interest earnings.

Savings accounts provide worry-free flexibility for basic cash savings needs.

While money market accounts offer modestly higher interest rates than basic savings, limitations around transfers and minimum balances can make savings a preferable choice for shorter-term holdings. Consider both liquidity needs and earnings incentives when choosing an optimal savings vehicle.