There are many different savings vehicles to choose from, but two of the most common are money market accounts and savings accounts.
There are similarities between the two—both pay interest, have fixed balances, and are pretty easy to deposit money into or withdraw it out. Either account type could accomplish your savings goals.
But there are significant differences between them, and those differences could help you decide when one is more appropriate as a savings vehicle than the other.
Money Market Accounts VS Savings Accounts
Money Market Accounts
Money market accounts are managed funds—much like mutual funds—where the object is to provide a return on investment while also maintaining safety of principal.
They do this by investing in very safe and very liquid securities, which themselves pay interest but also maintain constant values. In order to do this, money markets invest in short-term securities, usually less than one year in maturity, which minimizes price changes. United States Treasury bills are typically a very large component of money markets.
Money market accounts became very popular in during the 1970s due to wide interest rate fluctuations and double digit interest rates. Because the funds invest in short-term interest bearing securities on a constant basis, during rising interest rate environments they are able to achieve higher interest rates much more quickly than more conservative savings instruments, like savings accounts or certificates of deposit.
[Related: What is a Certificate of Deposit?]
Money market accounts that are offered by banks (money market DEPOSIT accounts, or MMDA’s) are FDIC insured, but many are also offered by mutual funds and investment brokerage firms that aren’t covered by FDIC. There is, therefore, some risk of loss as a result.
In addition, many money market funds have minimum start-up or minimum balance requirements. Some may also charge fees if your account falls below the minimum balance requirement, or if you have over a certain number of transactions.
Savings accounts are perhaps the simplest form of savings instrument.
You can open one at your local bank—which means you can also access the money in person. These days you can also easily open an online savings account as well. As bank instruments, they’re also fully insured by the FDIC.
On the downside, savings accounts typically pay low rates of interest.
They represent passive savings where the principal focus is safety rather than return. They’re also somewhat more difficult to access than checking accounts because either you don’t have check writing privileges, or you’re limited to a very small number of such transactions before fees will be incurred.
The best ways to use either
On the surface, money market accounts and savings accounts may seem to compete with one another for the depositor’s dollars, but that isn’t nearly true. Each has a place in your finances, but under different circumstances and for different purposes.
When to use money market accounts:
- In rising interest rate environments—money markets adjust quicker
- In conjunction with investment accounts for un-invested funds
- As a place to park your money short-term
When to use savings accounts:
- For a starter account, especially for kids—they have no minimum balance
- For dedicated accounts where you’ll use the money quickly
- For accounts that require quick and easy physical access to your money
- When you want complete safety of principal (FDIC insurance coverage)
- As emergency funds
You can even blend the two with a tiered savings plan.
For example, you could have money from your paycheck deposited into your savings account until you have enough that you can transfer it to your money market account. Having both types of account can give you much more flexibility than if you just have one.
Nice post, good job of clearing up the confusion between the two types of accounts.
I’m a big fan of having a savings account as an emergency fund. Like you said, easy to access and safe with a slight return. Makes for the perfect type of account whenever something costly and untimely pops up.
Thanks for this comparison. Look for this piece in our roundup this week.
-Christian L. @ Smart Military Money
I had a money market account when rates were higher but now my money is parked in a savings account. When rates begin to rise I may take a look at money market accounts again.
The problem with savings account nowadays is that they pay negative interest (inflation-adjusted). But what choices do most people have? The stock market doesn’t move.
The stock market moves all the time.
It’s true that most savings accounts don’t have high interest at the moment but it’s still a great place that’s safe.
The whole point of having a savings account is to set that money aside. You shouldn’t let the fact that having a money market account can cost extra if you let your balance go too low because you’ll probably leave the money alone. Yes emergencies happen but the risk is definitely worth it.
Was it some MMs that almost/did break the buck?