Money Market Account vs. Savings Account: Which Is Better?

What Is a Money Market Account?

A money market account works like a checking account and savings account in one. Most come with a debit card or checkbook, making it easy to use your money. Your balance will also earn interest. It's important to note that just because you can pull money out with ease doesn't mean you necessarily should. A checking account is still the best option for daily transactions and regular spending.

A money market account can make sense for some recurring bills that you'd like to keep separate from your daily account. For example, let's say your car insurance premium is due every six months. You might break that payment into six equal installments that you put into a money market account on a monthly basis. You can then put that bill on autopay.

Money market accounts tend to earn competitive interest rates. At the time of this writing, some annual percentage yields (APYs) exceed 5%. But every financial institution is different. Better rates may require a certain minimum account balance. You may also be limited to six electronic transfers and withdrawals per month.

Pros and Cons of a Money Market Account

Money market accounts have unique pros and cons.

Pros

• Higher-than-average interest rates: The average savings account interest rate is 0.40%, according to the Federal Deposit Insurance Corp. Money market accounts tend to offer much more. If you have an account with an APY of 5.12%, you'll earn $51.20 annually for every $1,000 you keep in the account.
• Liquidity: Unlike a certificate of deposit and certain tax-advantaged retirement accounts, funds in a money market account are relatively easy to access. You might be limited to six free electronic transfers or withdrawals in a given month, though every financial institution has its own rules.
• Safety: Money market accounts are FDIC-insured for up to $250,000 per depositor, per institution. Stocks or other high-risk assets, on the other hand, aren't insured and could lead to significant losses.

Cons

• Potential fees: A money market account might charge a monthly maintenance fee or other bank fees, so be sure to read the fine print.
• Minimum balance requirements: In some cases, your interest rate might drop if your balance dips below a certain amount.
• Returns lag behind other investments: Volatile investments carry more risk but also have the potential for greater returns. That includes investing in the stock market.

What Is a Savings Account?

A savings account is designed to hold your cash reserves. That can include your emergency fund as well as money you're squirreling away for other financial goals. It earns interest like a money market account but probably won't come with check-writing capabilities. You'll likely access your funds through an ATM or by electronically transferring funds from your savings account to your checking account. You can also set up autopay and use your savings account to cover certain bills.

A high-yield savings account functions like a regular savings account but offers a higher APY. Some currently offer as much as 5%. That can make a high-yield savings account an attractive place to grow your emergency fund.

Pros and Cons of a Savings Account

Like any financial product, savings accounts have their pros and cons.

Pros

• Competitive interest rates: Like money market accounts, high-yield savings accounts typically pay higher interest than traditional savings accounts. That can help your cash savings work harder for you.
• Safety: Like money market accounts, savings accounts are also FDIC insured for up to $250,000 per depositor, per institution. That can provide some much-needed peace of mind.

Cons

• Less robust returns when compared to other investments: The average annualized return for the stock market has been about 10% for the past century. Holding too much of your wealth in a savings account could mean missing out on significant growth over the long run.
• Possible fees: Every financial institution is different, but some may impose monthly maintenance fees or penalties like out-of-network ATM fees or inactivity fees.

Money Market Account vs. Savings Account

These types of accounts share some of the same features. Both offer interest rates that are higher than traditional savings accounts, and you'll have relatively easy access to your funds either way. There might also be a monthly cap on free electronic transfers and withdrawals.

• When a money market account might make more sense: Money market accounts stand out for their extra flexibility. Most come with a debit card that you can use online and for in-person transactions. You might also be able to write checks from the account.
• When you may want a savings account: With a high-yield savings account, not having such immediate access to your funds can be a good thing—it might prevent you from dipping into your savings. But in the event of a financial emergency, that money will be there for you.

The Bottom Line

If you're torn between a money market account and a savings account, think about your unique needs. One provides a little more accessibility than the other, but both can offer high interest rates—and that's good news for your emergency fund.

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