Money Market Vs Savings: What’s The Difference?

Brief Overview

Are you making the most of your savings?

If you’re not taking advantage of savings accounts that fit your financial goals then you’re likely missing out on opportunities to make the most of your hard earned money.

An important choice that you should be making is whether you should be using a traditional savings account or a money market account.

If you’re looking for a low risk place to put your savings, these two accounts give you options. 

Savings and Money Market Accounts are similar but they also have key differences. In this article we’ll define savings and Money Market Accounts, compare their similarities and differences, and help you choose which one is right for you.

What is a Money Market Account?

A Money Market Account is a form of a high-yield savings account that gives depositors a higher interest rate than most savings accounts. 

Owners are able to make withdrawals on a Money Market Account by using either checks or a debit card. 

The amount of withdrawals that can be made with these accounts are limited to six per month.

Money Market Accounts should not be confused with Money Market Funds. A Money Market Fund is a mutual fund that invests in short-term debt securities.

Money Market Accounts, on the other hand, function much like normal savings accounts. Rather than buying shares in a fund like you would in a Money Market Fund, with Money Market Accounts you make standard cash or electronic deposits.

Money Market Accounts at banks are insured by the Federal Deposit Insurance Corporation and those opened at credit unions are insured by the National Credit Union Administration. 

Advantages of Money Market Accounts

• Typically boast higher interest rates

• Relatively easy access to deposited funds via check or debit card

• Account benefits are simple and easy to understand

Disadvantages of Money Market Accounts

• Limited to six outgoing transactions per month

• Larger minimum balance requirements than savings accounts

• Other financial vehicles offer a greater potential return (Ex: Certificates of Deposit, 401k, etc.)

What is a savings account?

A savings account is an interest-bearing deposit account held at a financial institution. Their primary benefit is that they are an excellent place to store money that is needed for short-term goals. 

Withdrawals from savings accounts are also limited by federal law to six per month. Additional transactions will carry a service fee. 

These transactions are typically made by the bank, sending money from the owner’s savings account to another financial vehicle of the owner or the owner directly. This can be done by electronic transfer, by calling the bank, or by visiting a bank branch in person.

Banks rarely allow checks to be used for purchases, so withdrawals can’t be made by writing a check for goods or services like you would with a checking account.

Savings accounts are also insured up to $250,000.

Advantages of Savings Accounts

• Excellent short-term savings option

• Lower minimum balance requirements

• Liquidity of funds

Disadvantages of Savings Accounts

• Lower interest rates

• Inability to use checks

• Little to no value as a long-term investment

When To Use a Money Market Account

If you have a chunk of money that you’re looking to put towards saving for medium-term goals, then Money Market Accounts are a great choice for you.

This financial account can offer flexibility that a savings account can’t.

Example: if you’re planning on buying a home in the near future, you could take advantage of a Money Market Account to use checks or debit card for your down payment, inspection, and other required expenses. 

This account type can come in handy when you’re looking for a risk averse investment but you need for your money to remain liquid. Money market accounts can be used as alternatives to certificates of deposit (CDs) or Money Market Funds. 

While it may offer a lower rate of return, the freedom and flexibility that it provides may be worth it to you.

Be sure to check check with your bank to get a better understanding of their interest rates. Money Market Accounts may require that you meet a certain balance threshold to get the best rates. 

When To Use a Savings Account

Savings accounts are a great choice of account for you if you have short-term goals that you would like to put money aside for. 

These goals can include car maintenance, saving for electronics like a new phone, or a small home improvement project.

Savings accounts are good accounts to take advantage of when you’re not looking for a return on your investment, but rather a place to set money aside from your checking account for a specific purpose.

Having a savings account at the same bank as your checking account is the best course of action if you’re looking to minimize the amount of time it takes to transfer funds from one account to the other. 

Most banks offer instant internal transfers and some even have a mobile app that allows you to move money between the two with ease.

Having a checking account with a different bank may be frustrating because electronic transfers can take days to post. If you’re looking for a speedy way to access your funds, this may not be the account for you.

Savings accounts are also federally insured up to $250,000. Be sure to ask the bank to verify this coverage when opening a new account.

Important Notes

• For Those Depositing Over $250,000: If you have over six figures to invest, a savings account will be of very little benefit to you. Money Market Accounts are a better option, but you can potentially earn a significantly higher return with other investment vehicles. It is also important to note that both accounts are federally insured but only up to $250,000 which means that if you have more than that to place in an account, you should seriously consider not putting your funds in either.

• Create A Financial Plan Before Opening a New Account: A financial plan is crucial when it comes to opening new accounts because you first need to clearly define your financial goals before being able to fully understand which account is best for you. If you’re worried that your current plan isn’t making the most of your money, contact us for a free consultation and we’ll help you figure out whether or not you’re on the right track.

• Speak With A Financial Advisor: You should always consult a financial advisor before opening a new account. Advisors have in-depth knowledge of interest rates that banks simply won’t offer you as a stand alone consumer. Financial advisors are here to help you build wealth, banks are looking for ways to make a profit. Have you ever felt like you opened an account and then realized that you were sold on an account that doesn’t meet your needs? Contact a financial advisor to ensure that doesn’t happen.

• Explore Other Investments: While MMAs and savings accounts are options, there are plenty of other investments that can be more beneficial to you if you’re looking for a greater return. CDs and CD ladders could be a great alternative to the above accounts if this sounds like you. A financial advisor can explain the difference between each account type, its pros and cons, and whether it’s right for your particular financial situation. 

Still wondering which account is best for you?

Reach out to us! We’re more than willing to help you figure it out!

Written by Magdalena Johndrow, MSc, CFS®

Maggie is a Partner and Financial Advisor at Johndrow Wealth Management. She attended Providence College and the London School of Economics prior to beginning her career on Wall Street at Barclays and JP Morgan. She has taken her experience with high net-worth clients and used it to empower families and small businesses.