Money Market Accounts vs. Savings: What You Need to Know

money market accounts

The “MMA” you see in that banking ad doesn’t involve mixed martial arts, the Octagon, or kicks to the head. No, in the world of banking and savings, MMA refers to “money market accounts.”

A money market account can be a higher-yield alternative to a traditional savings account. Additionally, money market funds offer even more flexibility and yield potential, but with slightly more risk.

As you look for a place to keep your emergency fund — or even a vacation fund — consider a money market account or money market mutual fund to help you reach your goals.

Money market accounts vs. savings accounts

At the basic level, a money market account is a type of savings account. It’s even protected by the FDIC. The Federal Reserve describes money market accounts this way:

Before the mid-1980s, money market deposit accounts (MMDAs) had characteristics that distinguished them from ordinary savings deposit accounts. Now, however, they have the same characteristics as savings deposit accounts and are subject to the same transfer and withdrawal limits.

In practice, though, there are some differences between how banks treat money market accounts and traditional savings accounts.

Minimums and fees

One of the drawbacks of money market accounts is that they sometimes come with higher account minimums and more potential fees than traditional savings accounts. My own money market savings account requires that I maintain an average daily minimum balance of at least $1,000 to avoid a $10 monthly fee.

Many savings accounts, by comparison, require no minimums and charge no fees. If you aren’t able to maintain the minimum, a traditional savings account might be a better choice.

Not all money market accounts come with minimum requirements and fees, but with many situations related to deposit accounts, the greater the requirements, the higher the yield. You might have to give up yield if you choose a money market account without minimums and fees.

Annual percentage yield

Many banks offer higher yields on money market accounts than they do on savings accounts. The bank often uses the funds held in money market savings accounts to invest in certificates of deposit, short-term commercial paper, and government securities.

The bank’s ability to invest your funds in a wider variety of assets, plus the stricter requirements for depositors, can mean a higher annual percentage yield for money market accounts in some cases.

It is possible to find online savings accounts that have yields similar to what is offered by money markets. However, you won’t have the same access to your cash with traditional savings as you do with money market accounts.

Check-writing privileges (and debit cards)

Money market savings accounts often come with check-writing privileges that you don’t see with traditional savings accounts. You might describe a money market account as a hybrid between a checking account and a savings account.

However, even though you can write checks from a money market account, and even though many money market accounts issue debit cards, you are still limited. As with savings accounts, you have a monthly limit of six withdrawals or transfers from a money market account.

When you’re in a pinch, it can be useful to have money market account access. If you have a linked savings account at a bank with your primary checking, you can usually withdraw cash from an ATM. However, this isn’t always the case if you have an online savings account with no linked checking account.

If an emergency arises after hours and you need to tap your fund, it’s hard to do so with the money locked away in a savings account you can’t access. With a money market account, it’s possible to use your debit card to make a needed purchase or withdraw cash from an ATM. Just make sure you stick to the withdrawal limits.

How to use money market accounts

Money market accounts are best for those who are looking for a little extra yield and accessibility. It’s important to pay attention to the account terms when opening a money market account. Especially online, many money market and savings accounts are indistinguishable from each other.

The main advantage of a money market account is the easy access to funds by check or debit card. If you don’t have a savings account at the same bank as your primary checking, you might not be able to access the funds as quickly as you would like. While many online savings carry higher yields than brick-and-mortar accounts, they don’t always issue debit cards. You sometimes have to wait for a transfer to another bank to use the money. This can take several days.

I use my money market account for short-term emergency savings. I keep enough in the account that — even in an emergency — I’m unlikely to dip below the $1,000 required to avoid the monthly fee.

It’s also possible to use a money market account to save for short-term goals. If you want to earn a higher yield and save for a major purchase or a vacation, the money market account can be a good choice. Set the money aside, and when you’re ready to make your purchase, use the associated debit card. Just make sure you remain aware of account minimums and the withdrawal limits.

Money market mutual fund

If you decide using a money market savings account is the right move for you, it’s important to avoid confusing your account with a money market mutual fund.

Money market mutual funds are highly liquid and invest in short-term securities. These instruments might include short-term U.S. Treasuries, certificates of deposit, corporate commercial paper, and municipal obligations.

You might see a return higher than a savings or money market account, but money market mutual funds rarely beat other investments. They are often used by investors who want part of their portfolio in “cash,” but still want higher yields and more access than offered with bank accounts.

Because money market mutual funds are investments, you can withdraw money at any time — as long as you don’t have the funds in your tax-advantaged retirement account. Due to the low returns, it doesn’t usually make sense to make money market mutual funds a significant part of your long-term retirement savings strategy.

Also, it’s important to understand that because money market mutual funds aren’t bank accounts, the money you invest isn’t protected by the FDIC. That means you could potentially lose some of your principal — even though we often think of cash and cash-like investments as being completely safe.

Using a money market mutual fund

Money market mutual funds can be used to for emergency savings or to save for short-term goals. If you want a bump in yield, security and access without the worry of withdrawal limits, money market funds can be a good choice.

You enjoy the benefit of yields in line with (and sometimes higher than) high-yield deposit accounts. However, you don’t have to contend with the rules governing savings and money market accounts that limit the number of withdrawals you make each month.

Plus, even though you won’t see FDIC protection for your money, money market accounts have only dropped below $1 per share very few times. Odds are, your money is reasonably safe.

Is an MMA right for you?

Money market accounts and money market funds can be great choices depending on your goals. As you evaluate them, consider your situation and what you value. Here’s a handy breakdown of money market and savings accounts that can help you decide:

  • Traditional savings account: Ideal for savers who want FDIC protection and hope to avoid fees and minimums. It’s possible to see a competitive yield on savings accounts. However, you need to evaluate access. You don’t have the check-writing ability and might not be able to get to the money using a debit card.
  • Money market account: Consider this account if you can handle account minimums and potential fees in exchange for higher yields. Plus, you retain FDIC protection and the additional perk of check-writing and debit card privileges for easier access to your money. However, like the traditional savings accounts, there is a limit on withdrawals.
  • Money market mutual fund: If you can handle a little more risk, and are willing to give up FDIC protection for greater access to your money, a money market fund can work for you. You have access to the highest potential yields among these three but without restrictions on withdrawals.

You can use all of these accounts for short-term savings and emergency fund goals. Once you understand their pros and cons, you can decide what works best for you.

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