Benefits of money market accounts vs. savings accounts
What's the difference between a money market account and a savings account? If you're looking for the best way to invest your money for safe-and-sure returns, they are both viable options for you--but they're not the same.
It's important to understand the different kinds of accounts and which best suits your needs. If you're putting aside a windfall, saving for your retirement or keeping an emergency fund, you'll probably find that this kind of account wins out in the money market accounts vs. savings accounts matchup.
Similarities of money market accounts and savings accounts
Both types of accounts are offered by banks and traditional financial institutions, and both may have limits on fee-free transaction activity or require minimum balances. In either type of deposit account, your money is protected by the Federal Deposit Insurance Corporation, which guarantees that no matter what happens to the bank, your money (up to federally mandated ceilings) will still be available to you.
Beyond these similarities, however, lies a world of difference.
Money market accounts vs. savings accounts: who wins?
Money market accounts generally are considered longer-term investments than savings accounts. You aren't locked in to a specific term (as with a certificate of deposit), but the concept is that you will deposit funds that you don't need to access every day.
The bank pays you a higher interest rate on average in return for a few restrictions. If you play it right, these restrictions may not bother you at all. For instance, money market accounts usually have a required minimum deposit amount--anywhere from $100 to $1000 or more--and a minimum ongoing balance. If the funds in the account drop below that minimum, or if you withdraw more than a fixed amount or set number of times per month, you may be charged additional fees.
In contrast with savings accounts, you'll find that money market accounts:
- Have slightly less liquidity. The transaction limitations and minimum balance requirements are small barriers to accessing your cash frequently. This is to protect the bank, which can then turn around and invest that money in slightly longer-term investments of its own. However, as long as you're not using your money market account as you would a checking account, you may find that the requirements don't limit your use of those accounts at all.
- Offer a substantially higher rate of return. According to the FDIC, while the average savings account rate in March 2011 was 0.16 percent, average money market rates in the neighborhood of 0.22 to 0.34 percent. Though rates can fluctuate, it's a consistent pattern that consumers get higher average rates with money market accounts than with savings accounts.
All of these differences work in an investor's favor. If you're saving for your retirement or a long-term financial goal, you probably don't need the liquidity of a traditional savings account or checking account. In fact, the limits on withdrawals from a money market account are a great deterrent for anyone who has a tendency to raid the piggy bank on a whim. And the higher average interest rates makes money market accounts a clear winner in the money market accounts vs. savings accounts debate.
If you're saving a pot of money for the long run and want to earn higher interest without an increase in risk, a money market account is almost certainly a better choice than a traditional savings account.