Money market and high-yield savings accounts are both deposit products offered by banks and credit unions that pay more interest than your standard checking account. However, while they may seem similar at first glance, there are some critical differences between them.
What Is A High-Yield Savings Account?
A high-interest savings account is a deposit-based account that pays interest at rates about 20x the national average savings interest rate. How is this possible?
Most high-yield savings accounts are offered by online-only banks, which cuts the costs of brick-and-mortar locations. These online banks can then provide high-interest rates that grow your money passively.
How Do High-Yield And Standard Savings Accounts Differ?
To put these gains into perspective, say you and your friend both had $10,000.
You open a high-yield savings account with a 1.00% APY, whereas your friend opens a typical savings account with a 0.05% APY. Over just ten years, you’ll have made about $1,000 more than your friend! Not to mention that the only difference between you and your friend was that you read about these accounts.
By not opening a high-yield savings account, it’s almost like leaving free money on the sidewalk.
The shocking thing about the scenario I’ve described is that it happens all the time. I know friends and family that have never opened a high-yield savings account. All that foregone interest.
If you’re reading this article and you don’t have a high-yield savings account or MMA, you should open one now.
|Bank||APY %||Minimum Deposit|
But Aren’t The Interest Rates Tiny Anyways?
Well, yes, if you look at it like that, then your other options are:
- Leaving your money in your piggy bank
- Placing your money in a standard savings account
By not placing your savings into a high-yield savings account, you’ll be missing out on thousands of dollars like in the previous example. Keep in mind that the effort required to run either account isn’t different. In other words, it’s quite literally like saying you don’t want free money.
But wait, it gets more complicated. There’s something called inflation.
The average rate of inflation in the United States hovers around 2% every year. If you put your money under your pillow or in a regular savings account, then you’ll be losing money to inflation every year.
A high-yield savings account will fight against the inflation rate to keep you above the minimum.
So sure, the interest rates might be low, but they aren’t irrelevant. Their rates earn significant cash over the years and stand against inflation.
Pros And Cons Of High-Yield Savings Account
High-yield savings accounts offer stellar interest rates that can pay out a lot over time. However, you can only withdraw your money externally a maximum of six (6) times a month. In short, there’s a tradeoff between your APY and liquidity.
Furthermore, these accounts are generally insured by the FDIC for up to $250,000. Insurance means that if your bank were to suddenly collapse, you would still get up to $250,000 of your money. This protection makes savings accounts safer than storing your life savings at home, where a house fire or robbery could ruin everything.
|High APYs||Little to no in-person branches|
|FDIC insurance up to $250,000||Limited access to funds (max six external withdrawals a month)|
|Most online-only banks have 24/7 customer service|
|Online-only banks generally have little to no fees|
What Is A Money Market Account?
A money market account (MMA) is the child of a savings and checking account. MMAs are structurally almost entirely the same as a savings account, except there are generally three key differences:
- Usually require a high minimum balance
- Typically have higher APRs than savings accounts
- More liquid than savings accounts
The same story about leaving money on the street still most certainly applies here, but to an even greater extent. Since MMAs can have higher APYs, they will pay out more over time.
Higher Minimum Balances
You might be wondering throughout this article thus far: how can MMAs offer higher interest rates?
It comes down to the typically required minimum balances. With high-interest rates comes hefty minimum balances.
Since banks use your money to make more money, they’d be more than happy to give you slightly higher rates if you give them lots of money. Remember that banks offer various lending products such as loans, which have interest rates that can start around 3%.
If your bank offers a 2% interest on your MMA deposits, then they can use that money to lend it to others for higher interest rates, making money for the bank. The more money you give the banks, the more money they can generate.
Higher APRs Than Savings Accounts
According to the FDIC, the national average APY on an MMA and savings account were 0.11% and 0.07% for the last six years. Given that MMAs typically need higher minimum balances, it’s no surprise that MMAs have always had higher interest rates than their savings account counterparts.
|National Average APR|
More Liquid Than Savings Accounts
MMAs come with unique liquidity features. While MMAs and savings accounts are both limited six (6) external withdrawals a month, MMAs generally have debit card and limited check access that allow you to access your money much more frequently than a savings account.
Pros And Cons Of Money Market Accounts
Generally speaking, MMAs are an excellent deposit account to grow your savings. They provide high APYs alongside increased liquidity. However, most MMAs require a high minimum balance, which can deter many people from opening one. Furthermore, they suffer from the same withdrawal limit as savings accounts, but offer limited debit card and check use.
|Higher APYs||Online banks have little to no brick and mortar locations|
|FDIC insurance up to $250,000||Somewhat limited access to money (max six external withdrawals a month)|
|Most online-only banks have 24/7 customer service||Require high minimum balances|
|Online-only banks generally have little to no fees|
|More access to funds via debit card and limited check-writing|
Which Is Better: A High-Yield Savings Account Or MMA?
Neither is necessarily “better” than the other. They are each good in their own right and are best used together—more on this later.
The main difference between them is that MMAs typically have better APYs than savings accounts and have higher minimum balances. MMAs alone also provide more ways to tap into your money.
When Should I Get An MMA?
You should get an MMA when you feel like you’ve:
- Run through the eight steps of personal finance and established an emergency fund
- Earned enough savings to surpass the minimum balance
- Opened or considered a checking account
Since an MMA doesn’t allow unlimited access to your funds, it’s important to not lock up everything into one MMA. Instead, you should also open a checking account to have unhindered access to a portion of your money at any time of the day.
Furthermore, you can’t get an MMA unless you have enough to meet the minimum requirements. Otherwise, the bank might charge fees or close your account if you can’t make the threshold. Thus, you can only enjoy these perks and benefits once you’ve saved up enough money.
When Should I Get A High-Yield Savings Account?
On the flip side, you should get a high-yield savings account when you have:
- Run through the eight steps of personal finance
- Money underneath your pillow or in your piggy bank
- Opened or considered a checking account
Most top tier online-only high-yield savings accounts don’t charge annual fees nor require minimum balances. Consequently, you should open a high-yield savings account as soon as you can to take advantage of the interest rates. Leaving your money under your pillow will cause you to lose out on a lot of passive gains and inflation.
Moreover, opening a savings and checking account alongside one another is pretty standard. Each account’s strengths cover the other’s weaknesses. Thus, split your money between the two accounts accordingly.
How Do Money Market accounts and Savings Stack Up Against CDs and Checking Accounts?
In brief, here’s a quick summary of certificates of deposits and checking accounts:
- Certificates of Deposits (CD): Best APY account that locks up deposits for some time
- Checking accounts: Most flexible type of account that offers unlimited access to funds but pays little to no interest
With so many types of accounts, how do you balance between them?
Say you have $25,000, and you want to maximize the interest you earn while maintaining access to your money. You could split it by:
- $15,000 in a CD
- $5,000 in an MMA
- $3,000 in a savings account
- $2,000 in a checking account
Why does this distribution work? Well, if you put all of your money into a checking account, you’d be barely earning any interest. You don’t necessarily need 100% access to your savings.
On the flip side, don’t put all of your funds into a CD. Then, you wouldn’t be able to tap into your money when needed, and that could be pretty bad.
Thus, stagger your savings into accounts that are increasingly less liquid but pay more. Putting around 60-70% of your savings away for the long term is a solid move. You could even throw them into a CD ladder to maintain liquidity.
With the remaining money, split it between an MMA, a high-yield savings account, and a checking account. You’ll get the highest APY with an MMA, but you also need to have some money for immediate use via your checking account.
The core idea behind all this splitting is that you’re making the most interest possible while maximizing accessibility to your funds. There’s no “one size fits all” rule for this organization.
In short, all four accounts perform best when used together.
Is An MMA The Same As A Money Market Fund?
No, they are about the same as a bat is to a bat. The first flies, whereas the second is for baseball.
An investment company like Fidelity offers a money market fund, which is a mutual fund investing in safe assets such as U.S. Treasury securities. Money market funds are some of the least volatile investments out there.
However, money market funds differ significantly from money market accounts. For example, MMAs are protected by $250,000 worth of FDIC insurance, whereas money market funds have no insurance protection. This difference is crucial to understand.
If you were to lose all of your money from your money market fund, tough luck.
Ensure that you fully understand their differences before opening either account.
The Major Takeaways
Money market accounts and high-yield savings accounts are more similar than different. The differences are that MMAs typically have higher APYs, required minimum balances, and more ways to access your money.
Can you go wrong with opening either one? Nope. Both are excellent ways to save money and to earn interest.
Is either one better than the other? Nope again. They perform at their best alongside their siblings, the CD and checking account. Each account’s pros cover the other’s cons and vice versa.
Check out some of the best money market accounts!
John Ta is an undergrad at the University of Pennsylvania and the founder of Penn’s first undergrad personal finance club, Penn Common Cents. As a first-generation college student, he had to learn everything about personal finance on his own and seeks to mend the financial literacy knowledge gap seen almost everywhere. John is currently studying for an MS in Chemistry and a BA in Physics (business & tech concentration), Biochemistry, and Biophysics and is interested in the intersections of finance and healthcare.