Gone are the old days where money was kept in false bottom drawers or stitched tightly inside your mattress.
Nonetheless, that doesn’t sound secure at all, let alone an efficient and effective way to save up.
You’re going to want to safeguard and possibly future-proof your hard-earned money if you can earn some interest, even better.
If you’re looking to do just that, then you have options to choose from to keep your finances healthy and safe, like money market accounts and savings accounts. Here is a quick rundown of the pros, cons, and watch-outs for each.
A Quick Overview
Checking accounts is a great way to stop spending and start saving money.
Nonetheless, money market accounts (MMA) and savings accounts (SA) are great alternatives that may even help you achieve your financial goals better.
Here’s a quick rundown of both:
|Savings Account||Money Market Account|
|FDIC/NCUA insurance (if bank/credit union is insured)||✓||✓|
Remember that both money market and savings accounts incentivize you to not touch your deposit by limiting withdrawals.
Yes, there are no limits on how many unlimited in-person and ATM withdrawals. Nonetheless, there’s a combined limit of six for the following transactions in each statement cycle.
- Payments made by check
- Electronic transfers
- Purchases made through debit cards
If you exceed the limits imposed on these, your bank may choose to close your account.
That’s why it’s best that you only deposit funds in savings or money market accounts if you know that you won’t be making these limited transactions often.
What is a Money Market Account?
A money market account — sometimes called a money market deposit account (MMDA) — is an interest-bearing account at a credit union or a bank.
MMAs have unique features that can make them stand out from other account types.
On the other hand, most MMAs pay a higher interest rate than your run-of-the-mill passbook savings accounts. It includes a debit card and check-writing privileges.
You may feel more restricted with MMAs versus regular checking accounts. Also, keep in mind that MMAs are important when you’re looking to calculate your tangible net worth.
MMAs are available at credit unions and online and traditional banks.
At banks, MMAs are insured for up to $250,00 by the Federal Deposit Insurance Corporation per depositor, per bank.
Note that if you have multiple insurance accounts at the same bank, such as savings, checking, or certificate of deposit, they are all counted towards the quarter of a million insurance limit.
Nonetheless, joint accounts are insured for $500,000.
Credit union accounts are similarly covered by the National Credit Union Administration — $250,000 per member per credit union and $500,000 for joint accounts.
An upside of MMAs include:
- Debit card and check writing privileges
- Insurance protection
- Better interest rates
and Credit Unions and banks may require:
- A specific initial deposit
- Keep a maintaining balance
Note that most banks may charge you if your balance goes below the allowable level.
The Difference Between A Money Market Account And Money Market Fund (MMF)
1. A money market account is considered a bank deposit; a money market fund is an investment product
Money market funds have historically stayed at a dollar per share. That’s why most investors have always looked at MMFs as quite a safe investment vehicle — almost a cash equivalent.
Even when the risks are lower when investing in a money market fund, there are still no guarantees regarding account yields and the price per share.
That is the greatest difference between MMAs and MMFs. An MMF’s value per share will always have the possibility of fluctuation.
Nonetheless, in an MMA, your dollar will always be a dollar.
2. The Insurance Coverage
Money market accounts are insured by either the NCUA and FDIC.
This means that the government guarantees up to $250,00 per depositor if a financial institution falls in the red.
On the other hand, money market funds are not covered by the NCUA or FDIC or by any other commercial or federal entity.
The Security and Exchange Commission may regulate MMFs and other investment funds, but it does not ensure the investors’ principal and ensure its performance.
3. The Minimums
An MMF’s minimum investment requirement may vary. Still, it’s usually upwards of four figures — similar to what investment companies or brokerages demand others in their fund family.
They may require less if the fund is going into an IRA.
An MMA’s initial deposit is quite small, which can range from $5 to $5000.
4. The Withdrawals
While both MMAs and MMFs are deemed highly liquid, one can be a little more fluid.
An MMA may give you access to a checkbook or a debit card for withdrawal, but as per federal law, you’re limited to six payments or transfers.
MMFs, on the other hand, do not have those restrictions. You can deposit and pull anytime you deem fit.
Nonetheless, suppose the market takes a downturn. In that case, the fund may restrict the selling of shares temporarily or impose fees to sell.
5. The payment to hold MMFs
Investment companies are not offering money market funds willy-nilly. There’s an expense ratio in the fund.
It means that some of your net assets are funneled into helping the fund’s management and administrative costs.
The expense ratio for MMFs is not high, but it may impact how much you earn from the said fund.
MMAs, Nonetheless, require no money to hold. Some financial institutions may require maintenance fees if you fail to meet a certain minimum balance every month.
Best Money Market Rates
As of September 2021, the top three financial institutions with the best money market rates are:
- Northern Bank Direct Money Market Account (0.50% APY)
- Ally (0.50% APY)
- Sallie Mae Money Market Account (0.45% APY)
What Is A Savings Account?
A savings account (SA) is a deposit account that pays interest and is held with a bank or other financial organization.
Even though these accounts often yield a low-interest rate, their safety and stability make them an excellent choice for storing funds for short-term requirements.
Savings accounts may have some restrictions on the frequency of fund withdrawal.
Nonetheless, SAs are more flexible, making them ideal for:
- Short-term savings like for vacations or luxury purchases
- Storing surplus cash
- Emergency funds
Virtually every credit union or bank — traditional and physical, or exclusively digital — and even brokerage and investment firms offer savings accounts.
It is because savings accounts are among the most important funds that financial institutions can lend to others.
Savings and other deposit accounts are important sources of funds that financial institutions can turn around and lend to others.
Rates can be quite varied, except for promotions that promise fixed rates per term. Credit unions and banks can modify their rates anytime they please.
The more competitive the rate, the more likely it will change. The federal funds rate can also put these changes in motion.
Maximizing Your Earnings in a Savings Account
Savings Accounts usually have lower interest rates, and they typically give higher returns.
Online banks also usually offer most of the best and most competitive savings account rates for the simple reason that without physical branches, they spend less on overhead costs.
It’s best to shop around. Beware of promotional offers — they may be attractive options in the short, advertised term.
Some will even cap the balance of accounts that may earn promotional rates or cut interests through fees.
Best Savings Account Rates
As of September 2021, these are the three top and most competitive savings accounts rates:
- SmartyPig by Sallie Mae – 0.70% APY
- Affirm – 0.65% APY
- Axis Bank – 0.61% APY
Possible Alternatives: Certificates of Deposit
The most restricted of these savings accounts is a Certificate of Deposit (CD).
When opening a CD, you usually need a minimum initial deposit. That money is locked for a specific term of your choosing — from a few months to five years.
If you take out your money before your CD fully matures, you should expect to pay a fine.
Depending on the size of the CD, you can earn a larger APY than a money market or savings account.
The Risks Involved
The FDIC or NCUA might protect the money you store away, but there are other risks to consider, like:
- Inflation. It is probably the biggest risk to you. As prices increase, yields may not be able to keep up. You may not lose principally, but over time, you’ll see a degradation of purchasing power.
- Fluctuating rates. The macroeconomic environment may affect accounts. CDs, MMAs, and yields are heavily dependent on the prevailing market conditions. As rates crash, so itdoes your profit.
CDs may offer some shielding from volatile rates because the term length to rate relationship is locked in.
Nonetheless, if your CD matures during a low-rate environment, you’re going to get stuck with a lower yield when you renew your CD.
Which One Is Right For You?
Your goals and financial status determine the account type you choose. If your funds aren’t that much, a savings account may make more sense.
Suppose you can provide a higher account minimum and you’re looking to earn a higher APY. In that case, the good choice might be a money market account.
If you’re looking to stash funds for a while earning an even higher APY, then go for a CD. Nonetheless, keep in mind that a CD is a commitment — you can’t pull funds until the term ends.
Did this help you make a decision? Check out these other articles:
- How Long Will My Retirement Savings Last– And How To Stretch Them?
- What Is Land Trust? Types And Benefits
- Understanding Annuity, Ordinary Annuity, And Annuity Due
Looking for another topic? Let us know what you want us to discuss next in the comments.