Money market versus savings account

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In a Nutshell

Money market accounts and savings accounts have a lot in common. To figure out which type of account is the best option for you, consider a combination of factors, including available interest rates and your short-, medium- and long-term financial goals.

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Understanding the difference between savings accounts and money market accounts can help you save more effectively — for everything from emergencies to a down payment on a house.

You know that hiding money under a mattress or in a sock drawer isn’t necessarily a great way to keep your savings secure. But what’s the most effective way to save? If you’re looking for a fireproof account where you can keep your cash and even earn some interest, you’ve got a surprising number of options to choose from.

A checking account can be a great place to keep your spending money. But savings accounts and money market accounts are alternative banking options that can better help you reach financial goals. These accounts are often insured by the Federal Deposit Insurance Corporation or National Credit Union Association.

Savings Account Money Market Account
FDIC/NCUA insurance (if bank/credit union is insured)
Interest-earning ability
Check-writing ability
ATM access
Unlimited withdrawals

 

One thing to keep in mind: Both money market and savings accounts encourage you to leave your deposits untouched by limiting certain types of withdrawals. While you’re allowed to make unlimited ATM and in-person withdrawals, you can’t make more than a combined total of six of the following types of transactions in one statement cycle:

  • Payments by check
  • Debit card purchases
  • Drafts
  • Electronic transfers

If you exceed the limit, your bank may close your account, so it’s best to only deposit funds in a money market or savings account if you know you won’t be making regular withdrawals.


What’s a savings account?

Savings accounts are bank accounts where you can deposit money and typically earn a small amount of interest.

Some savings accounts come with debit or ATM cards, which allow you to access your money by making a limited number of electronic transfers or ATM withdrawals. But you probably can’t use your savings account debit card to spend money on everyday transactions.

When should I use a savings account?

To save for short-term goals

A savings account is a great option if you need to build up an emergency fund or put money aside for a short-term financial goal — something you want to reach within the next couple of years.

Since you typically can’t make purchases directly from a savings account, keeping money in savings can help deter you from spending. But you can also quickly access the funds you keep in your savings account if you suddenly need them for an unforeseen expense.

FAST FACTS

How much money should I keep in my savings account?

It depends on your financial situation, but experts generally agree that it’s best to save between three and six months of your living expenses. This amount can help you temporarily replace your income in a financial worst-case scenario.

Savings deposits earn very low interest rates, so you’ll only want to keep a smaller sums in this type of account, putting larger amounts in an account that will earn more interest. Say you’re working toward a medium- or long-term goal, like a down payment on a home or college tuition for your kids. In that case, you’ll want to put your funds in an account where your interest rate keeps better pace with inflation.

To avoid penalties

Compared to money market accounts, savings accounts typically have lower fees — they may even have no fees. They’re also less likely than money market accounts to have a minimum deposit requirement, which means you won’t have to worry about keeping as much money in the account in order to avoid charges.

What’s a money market account?

Like savings accounts, money market accounts are bank accounts where you can deposit money and earn interest. Unlike savings accounts, the funds you deposit are invested into financial markets. Your funds will also earn more interest than they would in a savings account.

Money market accounts, sometimes called money market deposit accounts, allow you to write checks and access funds through ATMs or electronic transfers. But as with savings accounts, certain transactions from money market accounts are limited to just six per month.

When should I use a money market account?

To save for medium-term goals

Money market accounts typically earn higher interest rates than savings accounts. According to the FDIC, earned interest rates can be more than twice as high as for money market accounts than for savings accounts depending on how much you invest.

For that reason, it’s a better idea to keep money for medium-term goals — those you’re more than a few years but less than a decade away from — in a money market account. If you need cash for a down payment on a house, for example, depositing it in a money market account will likely earn you more money over a longer period of time than if you’d left it in a savings account.

But higher interest rates aren’t the only way that banks incentivize you to deposit and leave more cash in a money market account. Money market accounts typically require you to keep a minimum balance in order to avoid fees and earn the higher interest rate. The amount you need can vary from hundreds to thousands of dollars.


Bottom line

If you’re deciding whether to put your funds in a savings account or a money market account, you don’t have to choose just one. Both accounts can keep your money secure while helping you accomplish unique financial goals.

For longer-term financial goals, which could include anything from a down payment on a home to paying your child’s college tuition, consider looking beyond these just two options to find an account that earns you even higher interest rates. A certificate of deposit, a college savings account or even a retirement account may be the best place to save money for one of these major life goals.