Savings Accounts Vs. Money Market Accounts: The Case For Each

With the economy still in a state of disarray and interest rates so low you almost need a magnifying glass to see them, savers across the country are looking for safe ways to earn a respectable yield on their money.

Corporate failures and government bailouts have left people scrambling to put their money in only the safest of places. Lately, that has meant banks where FDIC insurance of up to $250,000 protects their hard earned assets.

Sticking with bank products means you’re left with relatively few options such as CDs. If you don’t want to lock up your money for a long period of time, your two primary options for your money are savings accounts and money market accounts.

Which one is better? Each has its advantages and may be more appropriate depending on what you’re looking for and how much you have to play with. And actually there is one more option we should compare and contrast along with the bank savings account and the bank money market account – the money market mutual fund. Let’s take a look at all three.

Bank savings account

Two of the primary reasons that people put their money into a savings account is they are looking for safety and a low required minimum balance.

Savings accounts provide the protection of FDIC insurance but the yields on these accounts are so low you’ll earn almost nothing by parking your money here. For many in today’s economic environment, the safety that comes with parking your money at a bank is more important than the yield.

Savings accounts have low minimum balance requirements and you can generally access your money whenever you need it.

Bank money market account

If you have a bigger balance available and are looking to squeeze out a bit of a higher yield, the bank money market account may be more appropriate.

Money market accounts carry the same FDIC insurance as savings accounts so your money is still secure. In exchange for a higher yield, money markets typically require higher minimum balance and possibly a daily balance requirement in order to earn the advertised yield and avoid monthly maintenance fees.

Also, money market accounts are not meant to be high transaction accounts. Usually, there are a maximum number of transactions you’re allowed to perform.

Money market mutual fund

Money market mutual funds are organized and managed like other mutual funds – as a managed pool of securities. And they’re not bank products. They’re run and administered by brokerages and investment firms.

This means they don’t carry the FDIC insurance guarantee. Does that make them a significantly riskier option? Not really.

Investment firms manage money market mutual funds so that they are ultra-safe. Typically, these funds carry only very short-term securities of the highest quality. That doesn’t necessarily mean that you can’t lose money on these but the odds of that happening are extremely low.

The primary advantage of money market mutual funds is the additional yield. These funds tend to offer a higher yield to compensate for the lack of FDIC insurance and this could easily add up to a couple of percentage points above savings account yields.

Which of the three options is best for you depends on your personal situation and your risk tolerance. Some prefer to go for the highest yield while some prefer the “bricks and mortar” safety of their bank up the street.

Each option has its advantages but it’s up to you to understand your options and make the best choice.


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