Money Market vs. Savings Account
In this guide you’ll learn the differences of a money market account and a savings account. You’ll learn the pro’s and con’s of each to better understand why each account is important and why many people have both to spread out there money.
Ready to get started? Let’s first learn about the money market account.
Learn –> How to Increase Your Income and Master Your Money (Saving, Investing, Taxes)
What is a Money Market Account?
A money market account is an interest-bearing account available at a bank of a credit union. In a way, a money market account is a type of savings account but with higher interest.
Money market accounts are not the same thing as money market mutual funds. Money market accounts at banks are FDIC insured while money market accounts at credit unions are NCUA insured. There is no such insurance available with mutual funds.
So, money market accounts are more like savings accounts than money market mutual funds. While they offer a higher interest rate, money market accounts also have higher minimum opening balances. One generally has to put up a few thousand dollars to get started.
Money market accounts allow a fixed number of check payments every month. They also have monthly caps on electronic transfers and debit card purchases. So, money market accounts are more restrictive than conventional bank accounts. They are designed to get you to save more rather than spend frequently.
Learn –> How to Increase Your Income and Master Your Money (Saving, Investing, Taxes)
What is a Savings Account?
A savings account allows the account holder to deposit money and save for the future. They are a lot more accessible and easy to open than a money market account.
All banks and credit unions offer a savings account. The account minimums are significantly lower than those of money market accounts. So, people from a wide range of financial backgrounds can open a savings account.
The money deposited in a savings account isn’t invested anywhere. It sits in the account itself and earns a small interest. Savings accounts are very liquid and you can withdraw your money whenever you need to.
If you want a savings account with a slightly higher interest rate, then there are online-only savings accounts which you can look at. Such online accounts have no physical branch and all interaction is done online or over the phone.
Just like money market accounts, savings accounts are also FDIC insured (or NCUA insured if opened at a credit union).
Savings accounts also have monthly limits on the number of withdrawals and electronic transfers. After all, they are also designed to get you to save money.
Resources:
- Real Estate Investing School: How to Retire on Passive Income
- How to Increase Your Income and Master Your Money (Saving, Investing, Taxes)
Which account should you choose?
Why would anyone choose savings accounts if one can get similar features along with a higher interest rate with a money market account? The answer is accessibility.
Not everyone has $5,000 of spare cash to open a money market account. And even if you did manage to put together a few thousand dollars, maintaining that balance over a long period of time is also something to think about.
If the money goes below the minimum balance level, then the account holder gets hit with a maintenance fee.
Savings accounts are great for younger folks who are just starting out or for people who have made a decision to save diligently and are starting from scratch.
Those who are about to enter college or have just started earning are a couple of examples of a savings account holder’s typical profile.
A savings account is for those who have a small amount of cash that they can save right away. Over time, savings account holders can open a money market account in order to generate long-term wealth.
Additionally, those who are saving for a financial goal which is to be fulfilled in the short-term should also opt for a savings account.
Money market accounts tend to make a meaningful difference when the money is deposited for a long period of time.
Plus, you do not have to worry about account maintenance fees if your balance goes below the limit due to the withdrawal of deposits for short-term goals.
Money market accounts invest in short-term and medium-term debt securities like government securities, commercial paper (bonds), and certificates of deposit.
Therefore, they are able to offer a higher interest rate to account holders. Deposits in savings accounts cannot be routed to such investments and, therefore, the interest rates are also lower.
Learn –> How to Increase Your Income and Master Your Money (Saving, Investing, Taxes)
Money market accounts are meant for people who can commit to leaving their money in the account for long periods of time.
While the interest rate on a money market account isn’t spectacularly high, it is slightly higher than what a savings account can give.
Over time, even a couple of percentage points of difference can lead to a significant difference in wealth generation. So, every percentage of interest rate matters when looking at a 10 to 12-year horizon.
People who have higher balances will find money market accounts to be a more attractive place to park their cash. People who will not treat the money market account as just another bank account from where essential and discretionary spending will be made are the right fit.
If you need a normal bank account, then a savings account is a better bet as it will allow you more flexibility in terms of the number of transactions and spending frequency.
Build Wealth with Real Estate Investments
Learn how to grow your wealth, establish retirement income, and become a millionaire through real estate investing. This training course features 50+ video modules as well as PDF downloads and worksheets to help you get started buying investment property regardless of age, experience, or income level. I just finished fixing up a 3 bedroom home with $40,000 of profit and rented it out for $1,250/month. You can do this too!