Savings are a crucial part of financial stability. Whether you have an emergency fund or investment funds, savings can provide security against unforeseen events or situations. As you can see in this chart using 2019 FED Survey of Consumer Finances data, Americans are saving more. In 2016, American savings had a value of $0.92 trillion. This has steadily increased over time to reach $1.29 trillion in 2019.
What is a Savings Account?
When it comes to the best place to deposit your money you’re looking at a savings account. These accounts give you the ability to not just deposit money but to keep it safe and still withdraw money too, and you’ll earn interest. For the most part you’re going to get these with a bank or credit union and they’ll be FDIC insured. Of course, you’re not going to get much in the way of interest, with the average amount being under 2% as of 2019. Even still, a little is better than nothing.
How Does it Work?
A savings account is considered a ‘time deposit.’ These are accounts that your bank can require you to keep for a set period of time without making a withdrawal or they can charge you some type of penalty. Usually, you won’t have these requirements but you may have a limit on the number of withdrawals that you can make in an account in a single month. You also might have fees monthly for these types of accounts and those fees might be based on how much money you have in the account. Plus, you’re not going to get checks.
The federal government actually limits the number of times that you can withdraw money out of a savings account in a single month, though you can make as many deposits as you want. In general, telephone or electronic withdrawals are limited to only 6 in a single statement cycle, which generally runs about 30 days (though you’ll have to talk with your institution to find out for sure).
What is a Money Market Account?
These types of accounts are somewhere between a checking account and a savings account in some of the best ways. For example, you’re usually going to get a slightly higher interest rate than a savings account. That will depend on the institution that you go with though.
You’re also going to have an ATM card and the ability to write checks. That means you don’t have to go into a bank or credit union and make a request for your money. Of course, you may not get these features so you’ll have to talk to the institution and you may have to request them.
How Does it Work?
Generally, you’re going to get a slightly higher interest rate here than you will with a savings account.
If you’re looking at saving some money for a specific goal that’s more than a couple years down the road but not quite a decade out you may want to look at a money market account. Larger purchases, like a mortgage, could be great for this type of account because you’re going to get a little more interest built up than if you just put the money into a savings account.
Of course, it’s not just about high interest rates. There are going to be other aspects you need to pay attention to. For example, your institution might require a minimum balance so you can avoid having to pay fees. The balance may also affect the interest rate that you get. For some, it could be a few hundred dollars and others might require thousands of dollars.
Comparing Money Market and Savings Accounts
|Access to Your Fund||Electronic transfer/phone call||ATM, debit card, check|
|Minimum Balance Required||None||$1,000-$2,500|
|Interest||Approx. 2%||Approx. 2.5%|
|Withdrawal Restrictions||3-6 per month||3-6 per month|
|Fees||Little to none||Little to none|
|Protection||FDIC protected up to $250,000||FDIC protected up to $250,000|
The Main Differences
In spite of the similarities, money market and saving accounts have a couple of differences:
- Increase Your Interest with Money Market Accounts
Generally, you’ve always been able to get better interest with a money market account over a savings account. These rates are starting to go down, however, and in most cases, you won’t have dramatic changes.
- Minimum Balances are Higher with Money Market Accounts
In general, you’ll need to have a little more money in a money market account than savings. This means you have to have a set amount in the account according to the bank. It could be anywhere from $1,000 to $2,500 or more.
With a savings account, the idea is to be able to store your money more securely. That means there’s generally no or a low minimum than other options. In fact, it’s not uncommon for a savings account to have absolutely no average daily balance or opening balance.
- Easy access to Accounts
One of the biggest things that you’ll find differences between a savings account and a money market account is how you can access your money. With a money market account, you can generally right checks and you can get a debit or ATM card.
With a savings account, you generally have to call the bank, make in-person requests or use an electronic transfer to get your money.
Where Are They The Same?
- Monthly Fees
When it comes to either of these types of accounts banks are generally going to make more in interest on the loans that they’re lending your money out for than they will spend in paying interest to you. That means they’re likely going to have very little in the way of fees if anything at all. If it doesn’t cost them much of anything they’re not going to worry about charging you.
- Limits on Withdrawals
With either of these types of accounts you could have a set amount that you’re allowed to withdraw at any given time. In general, you’ll be limited to 6 withdrawals in a month or billing cycle. Any more than this and you could be charged a fee. Just make sure you know what the fee is going to be before you go over your withdrawal limit.
- Protection and Safety
You don’t want to keep your money stashed around your house because it’s definitely not safe there. What’s great is that when you open an account with a bank or credit union it’s likely going to be covered by the FDIC. That’s the Federal Deposit Insurance Corporation and they make these institutions guarantee your money up to $250,000 because they’re taking on a lot of your personal information. You don’t have to do anything to get this coverage and you don’t have to pay for it either. It’s just there, waiting for you.
When should I Use a Savings Account?
Because you can't usually make purchases directly from a savings account, conserving money can help you avoid overspending. You can, however, rapidly access the cash in your savings account if you need them for an unanticipated emergency.
Savings deposits pay extremely little interest, so you'll want to retain just little amounts in them and put bigger quantities in a higher-interest account. Assume you're working toward a medium- or long-term goal, such as saving for a down payment on a house or paying for your children's college tuition. In that situation, you'll want to place your money in an account with a higher interest rate than inflation.
When should I Use a Money Market Account?
Interest rates on money market accounts are often greater than on savings accounts. Depending on how much you invest, earned interest rates for money market accounts can be more than twice as high as for savings accounts.
As a result, keeping money in a money market account for medium-term goals — those that are more than a few years away but less than a decade — is a better choice. If you need money for a down payment on a house, for example, putting it in a money market account will almost certainly make you more money over time than putting it in a savings account.
Banks entice you to deposit and leave more money in a money market account in a variety of ways, including greater interest rates. To avoid costs and obtain the higher interest rate, money market accounts often require you to maintain a minimum amount. The amount you'll require can range from a few hundred dollars to tens of thousands of dollars.
If you’re debating between a money market account and a savings account keep in mind that you don’t have to choose one or the other. You can get some great benefits no matter which way you go. If you want to make sure your money is more accessible but still saved you might want to go with a savings account. They don’t give you a lot of access but they’re available.
If you want to have more access to your account but you don’t want to have it freely available like with a checking account then a money market account might be the better way to go. This type of account gives you the ability to write checks occasionally without having to worry about transferring money, but it’s not quite as free and easy as a checking.
Just remember, you can have more than one and you could have both of these types of accounts.