Money Market Account vs. Savings Account

As technology pushes savers online to open new accounts, or change the status of their savings, the fine line between many traditional savings programs and accounts is shrinking, or in some cases, disappearing altogether. Money market accounts are more like savings accounts now than they were at any time in history.

Finding the Difference
The difference between money market accounts and savings accounts basically boils down to two things: usability, and customer features. Many of these features and uses are restricted by the company that creates the accounts or investment products, and each can vary from account to account and from bank to bank.

In most cases, money market accounts are treated in much the same way as a checking account, and a few choice money markets even come with debit card access or thin checkbooks for irregular purchases with the account. Most banks will require that their money market account holders process no more than three to five transactions per month, as doing so often puts the bank in a situation where it must alter its investment strategy in order to call up the money it might need in making good on an active money market account.

Savings accounts don’t allow for debit or check writing, and funds in a savings account are generally only for access via ATMs, a visit a branch of the bank or credit union, or via the internet, where funds can be moved from a savings account to a checking account before being spent.

Yields and Risks
All things considered, savings accounts offer the risk profile as that of any perfectly-safe investment. As you’re probably well aware, anything named “account” (besides a retirement account) that is sold at a bank is insured up to the $250,000 limit of the Federal Deposit Insurance Corporation.

As for yields, they vary, but generally speaking a savings account should yield slightly less than your average money market. This becomes more true when rates are higher, as the differential becomes more obvious; that is, earning 10% on a savings account and 11% on a money market account is easier to see than earning .5% on a savings account and .55% on a money market account. Take into consideration that these numbers are examples—in only one time period, the late 70s and early 80s, did savings accounts or money markets every provide returns that exceeded 10% per year.

Yields for money market accounts usually vary by the type of money market account:

7-Day Money Market Accounts – Seven day money market accounts have flexibility in that they can own investment products that have a maturity of a longer date than other money market accounts. When the maturity date is further out in the future, then the returns on the investment are generally higher. Of course, these types of money market accounts are likely to have limitations on check cashing and purchases, as banks have less liquidity with the assets they hold in these accounts.

1-Day Money Market Account – The one day money market account is one in which the holdings are either T-bills (short-term US Treasuries) or corporate paper and other short-term debt obligations set to reach maturity within the next two days. The idea is that these funds are more liquid, as they will either be returned by the borrowing party, or the bank can sell them without a hitch in the next day of trading.

Ultimately, in this period of low interest rates, there may be little benefit in storing your money in a money market account except for the ability to write infrequent checks. If you already have a checking account, opening up a money market account to displace a savings account truly doesn’t make all that much sense.

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