Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.
It’s possible that you’ve heard the terms “savings account” and “money market” and assumed that they were interchangeable terms. Maybe some smarty in bank marketing got an idea to treat the boring old-fashioned savings to a facelift and rebranded it as the sexier “money market.” Nope, this is not true. Though the two products will serve the same general purpose for you, they’re two distinct critters. Are you prepared for your minds to be totally blown by the ways these accounts differ? Good.
Money Market Account vs Savings Account
What is a savings account?
A savings account is an account you open with a bank in order to hold money you need to access at any time. It would be fair to call it a cash-equivalent because if your bank is open, you’re free to march in anytime and collect your money. They are unlike investment accounts, where liquidating investments into cash can take a few days or more to process.
Most financial advisors suggest that everyone should keep three to six months of expenses on hand in case of some sort of financial emergency. Though movie gangsters and corrupt politicians prefer to stash their emergency cash in freezers or suitcases in the rafters, normal folks would be better off keeping theirs in a bank where vermin can’t eat it. Indeed, savings account deposits are protected in the US up to $250,000 in case of bank failure (or mouse infestation).
In banks, unlike freezers, your savings can earn a bit of interest. But, being the operative word since nobody is likely to make a fortune by keeping money in savings accounts. In the last several years, interest rates have been at historic lows. Most savings accounts offer well under 2% interest per year.
For this reason, a savings account or a savings investment account is perfect for emergency funds, or to safeguard cash you’ll need for a down payment on a house or a car. It's a terrible place to keep large sums for long periods since inflation is likely to outpace the account interest, and in the long run, you’ll essentially be losing money. Instead, it might be wiser to start investing your money.
What is a money market account?
A money market account is similar to a savings account, in that it’s a dependable place to keep your money since the FDIC insures accounts up to $100,000. But there is one major difference...
Banks are very limited with what they’re legally allowed to do with your savings account deposits. Basically, they can loan the money out to other customers for mortgages and other loans at a higher rate than they’re paying you and then split the proceeds they earn with you in the form of account interest.
Banks are permitted to invest your money market deposits differently. By investing in short-term, liquid securities, they'll be in effect loaning your money out to highly qualified borrowers. Money market funds may be used to buy Treasury Bills, which are government bonds with a maturity date of less than one year, or what’s called “commercial paper,” which are just highly rated, corporation-issued bonds with a similarly short maturity date, or even municipal bonds, bonds issued by local governments. In some ways, money market accounts are similar to saving investment accounts. Rather than have your money lent out to others, it's invested elsewhere.
Since security is of paramount importance in a money market, it’s important to understand the difference between a “money market” and a “money market fund”. Money market funds may be similarly stable and invest in many of the same things as money markets, but they’re mutual funds, and as such are not insured by the FDIC. For this reason, the government sometimes refers to insured money markets as “money market deposit accounts.”
What is a money market savings account?
A money market deposit account may sometimes be referred to as a “money market savings account,” but money markets and savings accounts are slightly different. Both protect your principal, but money markets invest in short-term bonds, may offer slightly higher interest rates, and may require a higher minimum deposit.
What's the difference between a money market account and a savings account?
From the perspective of security, savings accounts and money market accounts are pretty much indistinguishable. Although possible, it's unlikely that you'll lose your money in either one. But here are a few big differences between money market and savings accounts.
Though money markets have traditionally offered higher interest rates, it’s no longer always the case. Some online banks will offer interest on savings accounts that are at least on par with what’s offered for money markets. Do some research and understand that many rates you find trumpeted in big typefaces online are often introductory or “teaser” rates. They provide high initial interest rates designed to tempt you but that will fall down to earth after a few months. Don your monocle and inspect the fine print and choose whichever pays the most.
Generally, money market accounts offer checks you’re able to write and an ATM card, and won’t charge you to use either of them (limited, generally to a few free transactions a month.) Checks and ATM cards aren’t as prevalent with savings accounts. In some rare cases, it might take a few days to access funds from a money market.
Again, these accounts vary widely, so don’t treat this as the gospel, but money markets will generally have minimum amounts required to open them. Sometimes the account minimum can be $10,000 or more. If you don't want to put a ton of money into an account consider a savings investment account with no account minimum.
How does a money market account work
Money market accounts work much like savings accounts. They protect your principal and pay interest at a known rate and usually offer depositors ATM cards and checks. Unlike savings accounts, they are invested in stable, short-term government and corporate bonds. In the US, the FDIC insures money markets up to $100,000.
Money market account or savings account: Which to choose?
Really, it’s a toss-up, but understand that the only truly safe deposit is an insured deposit, so don’t park more than $100,000 in any one bank if you want it guaranteed by the government.
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