Savings and money market accounts are two popular options available to individuals seeking a secure, low-risk avenue to keep their money. Both options provide a safe place to store your funds while earning some interest.
However, each has unique features that may make one a better fit for your needs than the other. Read on to learn more about a money market vs. savings account so you can make an informed decision for your financial future.
SAVINGS ACCOUNTS: AN OVERVIEW
A savings account is a deposit account held at a financial institution that provides a modest interest rate. The primary function is to hold funds securely.
Savings accounts opened at credit unions are federally insured for up to $250,000 per depositor by the National Credit Union Administration (NCUA). Those at banks are also federally insured for up to $250,000 per depositor, but by the Federal Deposit Insurance Corporation (FDIC).
Savings accounts usually limit the number of transactions or withdrawals per month. They're meant for keeping money long-term rather than frequent transactions. However, they still allow easy access to your funds when needed, typically through electronic transfers, ATM withdrawals, or bank tellers.
MONEY MARKET ACCOUNTS: THE BASICS
Money market accounts (MMAs) are interest-bearing accounts offered by banks and credit unions. They often come with higher interest rates because they invest in short-term debt securities, such as U.S. Treasuries or corporate bonds, hence the term "money market."
Like savings accounts, MMAs are insured by the NCUA (if opened at credit unions) or the FDIC (if opened at banks)—making them a safe place for your money. They usually require a higher minimum balance and typically offer check-writing privileges and debit card access, providing more flexibility than a regular savings account.
DIFFERENCES
Is a money market account a savings account? No, there are several key differences between the two.
Interest Rates—MMAs typically offer higher interest rates than regular savings accounts. This is because they can invest in higher-yielding assets. However, the rates can fluctuate based on the money market rates.
Access to Funds—MMAs often come with check-writing and debit card privileges, making them a more flexible option than savings accounts. But, like savings accounts, they also have a limit on the number of certain types of transactions per month you can make.
Minimum Balance—MMAs generally require a higher minimum balance to open and maintain. In contrast, savings accounts typically have lower minimum balance requirements.
SIMILARITIES
Despite their differences, MMAs and savings accounts also share some similarities.
Security—Both accounts are typically insured up to $250,000 per depositor by the NCUA (when held at a credit union) or the FDIC (when held at a bank).
Purpose—MMAs and savings accounts enable you to deposit money you don't intend to use for daily expenses. They're perfect tools for emergency funds or saving for specific goals.
Transaction Limits—Both have federal regulations limiting certain types of withdrawals and transfers per month (usually six).
POTENTIAL RISKS
While MMAs and savings accounts are relatively low-risk options, they are not entirely without potential downsides. Understanding these risks can help you make a more informed decision about your savings strategy.
Inflation Risk—The primary risk is the potential for inflation to outpace your interest earnings. Inflation reduces the purchasing power of your money over time, meaning the interest you earn might not keep up with the rising cost of goods and services.
Interest Rate Fluctuations—Money market and savings accounts are both sensitive to changes in the broader economy. In particular, they are subject to interest rate risk. When the overall interest rate in the economy decreases, the interest earnings on these accounts might also decrease.
Although these risks exist, it's crucial to note that both types of accounts are among the safest investment options available.
WHEN TO CHOOSE WHICH OPTION
The choice between a savings account vs. a money market account largely depends on your financial needs and circumstances.
Choose a Money Market Account If: You've already got a substantial amount saved and are looking for better interest rates and more flexibility. If you also value having check-writing privileges and debit card access for your account, an MMA would be a suitable choice.
Choose a Savings Account If: You are unable or unwilling to maintain a high balance or simply want a safe place to store your money while earning some interest. Savings accounts are also an excellent start for those new to saving, as they typically have lower minimum balance requirements.
WHICH ACCOUNT IS RIGHT FOR YOU?
Both money market accounts and savings accounts are excellent tools for securing your financial future. No matter which one you choose, they’re a superior alternative to leaving your money in a checking account with low or no interest.
If you’re leaning towards a money market account, click the link below to learn more about the value and benefits of opening one at Wasatch Peaks Credit Union.
