What is a Money Market Account & How Does it Compare to High-Yield Savings?

Money & Relationships GRAPHIC-#2

A savings account is a popular way for people to put money away in savings. But did you know there are other types of savings accounts that can help you save? Two alternative savings accounts are money market accounts and high-yield savings accounts. These might be a good option for you if you want to earn higher interest on your savings account or if you want more flexibility in how you manage it.

Money market accounts and high-yield savings accounts earn you far greater interest than the standard savings account, although they have higher minimum balance requirements. With a money market account, you can write checks or make a limited number of debit purchases just like you would with a checking account.

Let’s compare money market accounts and high-yield savings accounts and determine when you’d want to open one of either:

What Defines a Savings Account?

To understand money market accounts and high-yield savings accounts, you should know a little bit about savings accounts in general and how they’re regulated.

A savings account is any bank account in which you can put money away for—you guessed it—saving. A savings account allows you to separate money from your checking account so you won’t be able to spend it as easily.

But a savings account doesn’t only promote savings through money allocation. Savings accounts typically have stringent rules that encourage you to keep your savings money untouched. You’ll find these savings account restrictions at every single banking institution because they’re federally mandated by Federal Reserve Board Regulation D.

Regulation D limits you to 6 savings withdrawals per month. You can deposit as much money into your savings account as you want—there aren’t any deposit limits. But you can only withdraw money 6 times per month. Note: there are certain types of transactions that do not apply to this withdrawal limit. If you withdraw money more than 6 times, you may have to pay a fee, or your banking institution may turn your savings account into a checking account. Regulation D applies to all types of savings accounts, including money market accounts and high-yield savings accounts.

There are other types of savings accounts, like a CD or IRA, that can be good solutions for long-term saving. We’ll discuss those toward the end of this post.

What is a Money Market Account?

A money market account is basically a hybrid between a checking account and a savings account. A money market account is a savings account, first and foremost. But you’ll also be able to write checks and make debit purchases, just like a checking account.

Regulation D still applies: you’re only able to make 6 account transactions per month. A “transaction” is defined as:

  • A debit purchase
  • A cashed check
  • A cash withdrawal
  • An electronic withdrawal or transfer

If you exceed the transaction limit, you may be penalized with a fee or your banking institution could turn your money market account into a checking account.

Money market accounts typically require a minimum monthly balance requirement—in other words, you have to keep a minimum amount of money in the account for it to stay open. If you dip below the minimum amount, you may be fined or your account could be closed. Standard savings accounts often have balance requirements, but money market accounts tend to have higher balance requirements. A standard savings account might only require you keep $0 to $20 in your account. A money market account may require you to keep anywhere from $0 to $100, or even $100+ in order to keep your account open.

The plus side is that money market accounts grant you higher interest rates than a standard savings account. In 2019, the average interest rate for a savings account was 0.09%. The average interest rate for a money market account, on the other hand, was 0.16%.

A money market account can be more lucrative if you’re going to keep your money in savings for a longer period of time. Another great thing about a money market account is that, like all bank accounts, they’re federally insured up to $250,000. If your bank or credit union goes under, your money will be protected up to the insured amount.

Money Market vs. High-Yield Savings Account

You might see some banking institutions describe a money market account as a “high-yield savings account.” Other banking institutions make a distinction between the two. We’ll describe the type of high-yield savings account that’s considered different from a money market account.

Just like with a money market account, a high-yield savings account grants you a higher interest rate (hence the term “high-yield”). It also requires that you maintain a minimum monthly balance. The main difference between a money market account and a high-yield savings account is that high-yield savings accounts don’t enable you to write checks or make debit purchases.

Which is Better: Money Market Account or Savings?

So what’s the best type of savings account to open? Should you open a money market account, a standard savings account, or a high-yield account?

You can actually benefit from having all three types of accounts. Having different savings accounts could be a great way to diversify your finances.

Here’s the problem with having only one savings account: there’s probably more than one thing you want to save for. For example, you might want to save for a vacation, for a house, and for retirement. You could use one savings account for all three of those items. But that wouldn’t give you a very good idea of how much money you’ve got saved for each one.

So why not open a separate savings account for each of the three items?

You could—but then you’d be missing out on some of the advantages that are offered by money market accounts and high-yield savings accounts. One way to maximize your savings is to keep different kinds of savings accounts for short-term, medium-term, and long-term savings goals. If you play your cards right, you could earn more money on interest and you’ll also be given the appropriate flexibility for each account.

When to Open a Savings Account

Savings accounts are optimal for short-term savings goals. When you have a short-term savings goal, you’re probably not going to be keeping your money in the bank for a very long amount of time, so you won’t be able to benefit much from interest earnings. A low-interest standard savings account with a low balance requirement should be fine for you.

A short-term savings goal might include:

  • Saving for vacation
  • Saving for the holidays
  • Saving for a security deposit/first month’s rent
  • Saving for an event
  • Saving for household goods, like new furniture

With short-terms savings, the money will be in and out of your account in a shorter amount of time, so it may be better to stick with a standard savings account.

When to Open a Money Market Account

A money market account is optimal for medium-term savings goals. With a medium-term savings goal, you’ll probably be saving for more than a couple years, but less than a decade.

Medium-term savings goals include:

  • Saving to buy a new vehicle
  • Saving for a home renovation
  • Saving for lengthier trips
  • Saving to support a new child
  • Saving for a mortgage down payment (this may also be a long-term savings goal)

With a medium-term savings goal, your money is going to be in the bank for a longer amount of time, so you have an opportunity to earn more money in interest. Since money market accounts offer more interest than a standard savings account, it’s a much better account for medium-term goals. When you’re saving for larger expenses, you’ll have more money going into the account so the higher minimum balance requirement won’t be as concerning.

A money market account is also great for emergency funds. An emergency fund is money you keep in savings that can be used for emergency purposes—maybe you lose your job, or have an unexpected medical or travel expense that you have no choice but to pay for immediately. You’ll never know how long an emergency fund will sit in your account before you have to use it. There’s a chance that the money can sit there for a long time, in which case you’d want to earn higher interest on it.

If you’re afraid that a single emergency can drain your entire emergency fund, it might be better to keep that money in a separate standard savings account.

When to Open a High-Yield Savings Account

Just like a money market account, a high-yield savings account is optimal for medium-term savings goals. Remember that you won’t be able to write checks with a high-yield savings account—for that reason, it might not be the best option if you’re living paycheck to paycheck.

However, high-yield savings accounts may have a lower balance requirement than a money market account, so it might be a good account to hold your emergency fund.

Savings Accounts for Long-Term Goals

When you’re saving for the long-term, you won’t be spending any of your savings money for at least a decade. Long-term savings goals include:

  • Saving for a mortgage down payment
  • Saving for retirement
  • Establishing a college fund for your children

Money market accounts and high-yield savings accounts may give you great interest rates, but they also provide you with too much flexibility to withdraw money. Long-term savings goals are some of the most important savings commitments you can make, and you want to do everything in your power to avoid siphoning the money you’ve put away.

That’s why banking institutions offer a variety of long-term savings accounts. A Certificate of Deposit (CD) is a popular long-term savings account that locks up your funds for a predetermined amount of time, although you’re able to keep contributing money to it. One of the most popular savings accounts for retirement is the Individual Retirement Account (IRA). An IRA, in particular, comes with tax advantages that may prove as advantageous as high interest rates.

Don’t be afraid to establish multiple savings accounts for each of your savings goals. And remember, you can always check where your finances stand—and learn how you can optimize them—using Turbo by Intuit.

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