The money market account vs. savings account debate can confuse enthusiastic money savers. These two accounts, however, have many things in common, so distinguishing them apart may sometimes become difficult.
For example, funds left in a money market versus a savings account yield tangible interests equally. Indeed, depending on the prevalent interest rates, these two accounts can protect your finances from inflation-induced devaluation. Interestingly, despite having several similarities, the different rules governing the operation of a money market account vs. a savings account will influence your choice.
Money market accounts and savings accounts both allow interest to accrue on deposits. However, the major difference lies in how account holders access their funds. A money market account functions more like a savings and checking account hybrid.
In contrast, a savings account encourages frugality by making access to funds a tad bit burdensome; checking accounts give holders no-holds-barred access to their money. So, a money market account is sandwiched between a checking account and a savings account.
There are two options for accessing funds in a savings account. One is to visit a brick-and-mortar branch of their bank to fill out a withdrawal slip. Two is to initiate a digital transfer to a checking account through their bank’s online portal. On the contrary, the money market account comes with a checkbook and debit card. So, account holders can draw funds without visiting a bank branch.
A Savings Account: What It Is and How It Works
A savings account is a financial product that allows an individual to deposit money long-term and earn interest on the funds. The average savings account pays an interest of over 5% on deposits. Opening a savings account seldom costs much, deposits are unlimited, and monthly withdrawals are often capped.
Savings accounts suit individuals who want to set aside money for goals. For example, income earners can use it as a trove for their emergency fund. Similarly, it is possible to save towards a major purchase with the help of a savings account.
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What Is a Money Market Account, and How Does It Work?
A common misconception about this financial product is that savers have to deal with money market accounts that are stuck for a set time. However, a money market account allows individuals to operate a pseudo-savings account. This account enables saving and simultaneously accessing the funds for bill payments and cash withdrawals. Withdrawals can be made through checks or a debit card.
One feature that distinguishes a money market account is its tiered interest rate. Unlike savings accounts with variable interest rates, the interest on funds in a money market account is a function of the current balance tier. Thus, a money market account is the best bet for individuals with huge funds to stash away.
A money market account resembles a checking account in that it can be used for purchases and bill payments. However, money market accounts can indeed perform transactions similar to savings accounts. Nonetheless, there are often limits to how many of these transactions can be performed.
Pros and Cons of Money Market Account vs. Savings Account
Most savings accounts are insured by the National Credit Union Association (NCUA) or the Federal Deposit Insurance Corp (FDIC). These insurance schemes cover savings deposits of up to $250,000 for each account holder.
Unfortunately, not all savings accounts offer competitive rates compared to the typical interest rate on money market accounts. Some offer interest rates as low as 0.01 percent. In addition, some banks offer a limited number of withdrawals on savings accounts.
On the contrary, money market account interest rates offer comparatively better annual percentage yields (APYs) than savings accounts. This category of banking products also offers more transactional flexibility than savings accounts.
The catch about NCUA/FDIC insurance for money market accounts rests on the holding bank. So, it is always best to ask if your funds would be insured before opening a money market account with any bank. The ease of access that money market accounts offer may be a bane for holders who struggle with spending discipline.
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How to Choose Between a Money Market Account and a Savings Account: Key Considerations
The choice between a money market account and a savings account hinges on multiple factors. Some of them are:
- Purpose of the funds being stored in the account
- The best rate and how fast we want the funds to compound
- Running fees that come with the operation of any of the two account types
- Account opening requirements.
All a prospective banking customer needs to do is identify the account attributes that best apply to their financial goals. After this, they simply need to visit a bank branch, provide the required details, and get an account opened. Overall, there’s no winner in the Money market account vs. savings account battle. Instead, the best outcome depends on the consumer’s financial preferences.