Savings Accounts vs. Money Market Accounts vs. Money Market Funds

When you want to stash away some of your money, it’s likely you’ll turn to the account options provided by local banks and credit unions. While it’s common to open a checking and savings account for easy access to your cash, it’s important to consider all of your options - including high yield savings accounts and money market accounts (MMA). Below we’ll outline what your options are and the important considerations to make as you decide which is right for you.

What is a Savings Account?

Just as it sounds, a savings account is a bank account specifically used for saving money. Because these accounts are designed to house money on a more medium or long-term basis, they typically offer a better interest rate than checking accounts. For many, a savings account is used to cover unexpected expenses such as a job loss or sudden home repair. In addition, savings accounts can be used to save for short-term goals, such as holiday expenses, upcoming vacations, or house renovations.

To access the money in your savings account, you will typically need to visit a bank teller or utilize your online banking system. Savings accounts are usually not accessed through the use of checks or debit and ATM cards, though an ATM card for a checking account can be linked to a savings account for ATM withdrawal and deposits. In fact, regulations limit users from withdrawing money from their savings accounts to no more than six times per month. Attempting to withdrawal more than six times could result in penalty fees or account suspensions.

What about High Yield Savings Accounts?

You may have heard over the last several years the name High Yield Savings Account. These have become very popular lately, especially as interest rates have been rising. A high-yield savings account is a type of savings account offered by certain financial institutions that offer a significantly higher interest rate than you'll receive from a normal savings account at a larger bank. These financial institutions offer high interest rates to entice more deposits. They then use a portion of those deposits to make investments that they expect to provide a higher return than they offer for the high yield savings account. The financial institution then keeps the difference between the gains they receive from their investments and the interest they pay account holders. For more information on this particular topic check out the previous Escient Financial Insights article Bank Failures and Fractional Reserve Banking. This really isn't much different from what a larger bank does with deposits though. High yield savings accounts are typically offered online, and you may not find them offered by banks that have branches you can walk into.

You may be asking if these accounts are safe. The short answer is they generally are safe if the bank is an FDIC member. It's important to ensure that any money you deposit with any financial institution is covered by FDIC insurance. There is generally insurance coverage up to $250,000 per depositor per account category per bank. If you're single you can have up to $250,000 coverage in checking and savings at a bank, and if you're a married couple you can have up to $500,000 coverage in checking and savings at a bank for joint accounts. There are other detailed nuances of FDIC coverage, and you can read more about that in the previous Escient Financial Insights article Understanding FDIC Insurance.

What is a Money Market Account?

Think of a money market account as a hybrid between a checking and savings account. It is designed for medium or long-term savings, but it offers easier access and withdrawal capabilities than a savings account would. When using an MMA, the bank actually invests the funds you deposit into the marketplace.

While MMAs are under the same regulation regarding withdrawal limits, most money market accounts can be accessed using checks or ATM cards.

What’s the Difference Between a Savings Account and a Money Market Account?

The biggest difference between these two types of accounts, aside from the ability to withdraw, is the interest rate. Generally speaking, MMAs will offer a higher interest rate than a savings account. In turn, however, many MMAs will require a minimum amount to open and remain in the account at all times. You may also find that Money Market Accounts are mostly offered by larger banks, and they may not offer interest rates that are as high as high-yield savings accounts.

There's Another Option: Money Market Funds

Not to be confused with a Money Market Account, a Money Market Fund is a type of mutual fund investment that is held in an investment account, such as a brokerage account or an IRA. There are many different Money Market Funds, and they have different types of investments within them. Some invest in only U.S. Treasury securities like Bills, Notes, and Bonds, while others may invest in municipals, repurchase agreements, corporate bonds, other types investments, or a combination of them all. The idea with Money Market Funds is that they invest in investments that are liquid, meaning they can be turned into cash rather quickly. Most U.S.-based Money Market Funds will be priced at $1.00 and will pay a dividend (equivalent to an interest rate payment) on a monthly basis.

Money Market Funds have some advantages, such as some may be exempt from state or federal income tax (depending on the investments within the fund), and you may buy and sell as much as you want within a month. There are some disadvantages as well, though. For example, there are fees for just holding a Money Market Fund (the expense ratio), and potentially fees for simply buying and selling. However, even with these fees, it's possible for them to actually pay a higher dividend (interest) than you could get from a high-yield savings account or money market account. Some Money Market Funds also require a minimum investment amount.

Another factor to consider is that some brokerage accounts, where you would hold the Money Market Fund, do offer checking account features where you'd have checks you can write and even a debit card, just like with a checking account. They could be set up to automatically sell Money Market Fund shares as you write checks or use the debit card for purchases or ATM withdrawals, even if you have other investments in the brokerage account.

An important consideration to take into account with Money Market Funds and brokerage accounts is that they are typically not FDIC-insured. Because they are securities and investments they fall under a different insurance called SIPC. SIPC insurance provides coverage for up to $500,000, $250,000 of which could be in cash. Also, the price of Money Market Funds could potentially drift from $1.00 in highly volatile market conditions, or if there are too many withdrawals at one time, the funds could be locked for a period of time.

While they’re similar in nature, there are a few key differences to consider as you decide what to do with your extra cash. These differences include convenience and ease of access to your money, FDIC or SIPC insurance coverage, taxation, the yield (via interest or dividend) of the account or investments, account minimums, and initial and later investment minimum, among others.

As you look to accrue savings and interest, it’s important to weigh all of your options to find what works best for you and your savings goal. Of course, deciding what to do with your cash is a very important decision, and can be a very complex decision to make. That's one of the reasons Escient Financial exists, so if you want help figuring out your cash management go ahead and schedule a meeting today!