Money Market Accounts vs. Savings Accounts

Key Takeaways

• Two of the safest and most popular interest-bearing accounts are money market and savings accounts.

• The account can inform future financial decisions, including regarding investments.

• Because money market rates are variable, they rise and fall with inflation.

During times of economic volatility, it can be especially important to have readily accessible funds in an interest-bearing account. The good news is that regardless of the amount of money one has, there is no dearth of interest-earning places to put it.

Money market accounts and savings accounts are among the safest and most popular options. While both account types offer advantages and are generally very similar, they do carry some key differences.

Choosing the right account can affect and inform future financial decisions. Read on to find out the differences below.

What are Money Market Accounts?

Money market accounts (MMAs) are highly liquid interest-earning accounts. The Federal Deposit Insurance Corporation (FDIC) insures them if held at banks. The National Credit Union Administration (NCUA) does so for funds held at credit unions.

Some financial institutions permit MMA holders to write checks and use debit cards for purchases, transfers, and ATM withdrawals. In that way, such accounts combine the features of checking and savings accounts.

It is common for money market accounts to have balance requirements or minimum deposits that exceed those of regular savings accounts. However, such accounts usually offer greater returns. The amount of interest these accounts pay may vary depending on the amount of cash held in them. Because account rates are variable, they rise and fall with inflation. As of last August, the national average annual percentage yield for money market and savings accounts was 0.13%.

While the federal government lifted withdrawal restrictions in 2020, some banks may impose their own limits on fund accessibility. Consumers are advised to ask their financial institutions about MMA rules.

What are Savings Accounts?

Savings accounts permit holders to deposit money, earn interest, and save for financial goals. They are often opened for use as cushions for emergencies and other short-term needs.

Highly liquid accounts usually offer higher rates than checking accounts This is also true of certificates of deposit accounts, money market deposit accounts and mutual funds. However, some online banks have high-yield savings accounts that offer more competitive rates. Note that with many saving accounts, interest rates are fixed.

Savings accounts are offered by banks and credit unions and are generally considered to be convenient and safe places to store money. Like money market accounts, either the FDIC or NCUA, depending on whether the account is in a bank or credit union, insures them.

Also as with money market accounts, there may be monthly limits on fund withdrawals, depending on the financial institution.

What are the Pros and Cons of These Accounts?

When it comes to a money market vs a savings account there are benefits as well as drawbacks to each account type.

Money Market Account

Pros:

• Interest bearing.
• Bill payments and check-writing permitted.
• ATM withdrawals allowed.
• FDIC/NCUA-insured.

Cons:

• Subject to rate changes.
• Nominal interest earned.
• Monthly withdrawals and transfers might be limited.
• May require a relatively sizable minimum deposit.

Savings Account

Pros:

• Interest bearing.
• ATM withdrawals allowed.
• Insured by FDIC/NCUA.

Cons:

• Yields are relatively low.
• Fixed-rate investments, such as may be the case with this type of account, are particularly vulnerable in inflationary economies.
• Bill payments and check writing are not permitted.

Similarities and Differences Between These Accounts

Both types of accounts earn interest, permit deposits and withdrawals, and are insured by the federal government. Unlike savings accounts, money market accounts usually have transactional features such as the limited ability to write checks and pay bills monthly. Some money market accounts also provide debit cards.

When is Each Account Appropriate to Use?

Since there are no too low minimums for opening one, a savings account may be the best choice for those who are just beginning to store their money. This is especially true if one has less than $1,000 for an opening deposit.

Those seeking the highest interest rates on their money with the smallest possible opening balances may want to consider online savings accounts. Online searches will produce a variety of such accounts for comparisons of interest rates and opening balance requirements.

On the other hand, a money market account may be best for those who prefer checking account-type savings access. Because such accounts typically come with debit cards and checkbooks, there is no need to go to a credit union or bank branch for withdrawals. The exception is if one needs certified funds such as a cashier’s check.

If minimum deposit requirements can be met, a money market account might also be best for those who seek the highest yield for their savings. The amount needed to open such an account can be as low as $0. However, minimums often range between $500 and $5,000. To qualify for the highest interest rates, some money market accounts require greater minimum balances, up to $10,000 and sometimes more.

Why is Choosing the Right Account Important?

Deciding whether to hold money in a money market or traditional savings account largely depends on the amount of money one seeks to save and how often one will need to access it. It is also important to factor in the amount of money one wants to earn and the level of risk one wants to assume. Whichever account is chosen can affect how quickly financial goals can be reached and the amount of money one has to invest in assets that can further grow their money.

Financial Decisions and Alternatives

From a financial standpoint, choosing where to place savings is but one decision a person must at some point make. For investors, there will also be decisions regarding the composition of their portfolios. Traditional choices include public market investments such as stocks and bonds, or a mix of both. Increasingly, investors are opting for the latter.

Alternatives to Money Market and Savings Accounts

There are other places investors can put their money that, while riskier, can offer better yields over time. More investors are now drawn to alternative investments with low correlations to volatile public markets.

Online platforms such as Yieldstreet offer help creating a modern portfolio that includes, in addition to traditional investments, asset classes such as art and commercial real estate. Investors can generate passive income while diversifying their portfolios. The objective is to produce consistent income independent of the stock market, which is subject to volatility.

Alternative Investments and Portfolio Diversification

Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.

However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary

Choosing between a money market account and savings account will depend on. the individual investor’s needs. Ultimately, decisions regarding which type of account to use are best made with diversification in mind. Alternatives are a great way to diversify a modern portfolio primarily composed of traditional investments.

All securities involve risk and may result in significant losses. Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.