Money market and regular savings accounts are both deposit accounts that pay higher interest than checking accounts. However, to receive this benefit, you have to accept some restrictions on accessing the money. Understanding the differences between these two types of savings accounts will help you determine which is best for you.
Money market accounts tend to pay higher interest than regular savings accounts. This is because your bank or credit union is allowed more flexibility to invest the money that you deposit. However, you should not confuse a money market account with a money market fund, which is a mutual fund that invests in the global financial market for short-term investments such as U.S. Treasury bills, large-denomination certificates of deposit and commercial paper.
The interest rate that your bank gives you often depends on how much money you have in your account. Most banks will offer tiered interest rates, so the interest you earn can increase as your balance grows. As with a regular savings account, interest on a money market account is usually compounded daily and deposited into the account each month.
Because of how financial institutions invest the funds, your bank or credit union may allow fewer monthly withdrawals on a money market account than on a regular savings account. U.S. banking laws have also been put in place to limit the number of withdrawals that can be made against the money market account.
Money market accounts usually have higher minimum balances than regular savings accounts, which is also because of how banks and credit unions invest the money. You may have to pay a service fee if your balance falls too low.
As with other bank accounts, the Federal Deposit Insurance Corporation (FDIC) insures your balance in a money market account up to a limit that the government sets. The National Credit Union Administration insures credit union accounts. You should not confuse a money market account with a money market fund, a type of mutual fund that is not usually insured.
Generally, savers who will not need complete access to a set sum of money may prefer a money market account to earn higher interest.