When I decided to start saving money for my emergency fund, I didn’t really worry about anything except the interest rate. If I was going to leave cash sitting in someone’s vault, I wanted it earning as much as possible. But this might not be right for you. It’s helpful to know some of the differences between a money market account and a savings account.
Savings Account
A savings account is the first kind of account many people have. I remember going to the bank and opening a passbook savings account where they actually wrote in the amount of my deposits. Yes, by hand. Though the process has been updated, it’s still a convenient way to separate a portion of your funds for a specific goal or a rainy day.
Many people open savings accounts at the same bank where they have their main checking account. In this instance, a savings account can act as a funding mechanism for your checking account in case of an overdraft. Many savings accounts can be started with as little as $5 with no fees.
Unfortunately, the interest savings accounts pay is often miniscule; we’re talking pennies. So the advantage of separating your money is lessened since you aren’t earning that much per year. However, if it’s better for you to have a backup funding source, the pennies turn into dollars by saving you overdraft fees.
To access your savings, you can withdraw the money via an ATM card, by visiting the bank in person, or by transferring your money into another account. Or you could choose to have the bank mail you a check.
Before 2020, savings account withdrawals followed some weird rules. By law, you were limited to six “convenient” withdrawals per month. Convenient withdrawals include checks to pay a third party, wire transfers, electronic fund or automated clearing house transfers, and overdraft transfers. So you wouldn’t have wanted to use your savings account as a bill pay service or if you have more than six overdrafts per month.
While these regulations were dropped in 2020, some banks and credit unions have been slow to update their accounts. There’s no requirement that they do so, although I can’t imagine many holding out for long as more and more banks make it easier to access your savings. If you sign up for an account, make sure you understand which rules the bank is following.
Savings accounts may be more difficult to access, don’t provide a checking account, and pay a little lower interest.
Money Market Accounts
Money market accounts can be thought of as hybrid accounts, with some offering a mix of a checking account and a savings account. Most banks offer money market accounts along with savings and checking accounts. You may be able to open a money market account at the bank where your checking account currently resides.
Given the times, you aren’t going to make a lot on interest with money market accounts. While the norm is for money market accounts to pay more than savings accounts, that may vary depending on the institution. Also, you may need to save up your initial deposit – some money market accounts require hundreds of dollars or more to open.
Money market accounts provide more access to your savings though. While they offer access through an ATM or in person (like a savings account), they may also provide a debit card and/or checks for purchases and bill pay. There are no limits to the number of withdrawals you can make compared to the six “convenient” limit mentioned above.
Money market accounts provide ease of access and usually a higher interest rate than normal savings accounts.
So, which should I choose?
The choice here comes down to what you really need and how well you manage your money.
If you’re someone who needs out-of-sight, out-of-mind money, a savings account at a separate institution might be best. An example of this – someone who wants to save up three months of expenses for an emergency fund but doesn’t really trust themselves not to spend it. If you’re this type of person, make it as difficult as possible to access the money while leaving enough avenues of access in case of a true emergency.
If you have a history of overdrafts in your checking account, open a savings account and tie it into your checking account so the money is readily available. Your concern here should be whether or not this will correct your problem or just provide more money to throw at the problem. Perhaps you should consider signing up for alerts so you know if you’re about to write a check that would bounce.
If you have very little cash on hand but want to build up an account over time, consider a no-fee savings account that you can start for very little.
For those with more cash or needing the combination of savings and checking, a money market account may be best for you.
Other options
Some people with large sums and no immediate need for the cash choose CDs, which can tie up your money for months or years at a time. You will incur a penalty if you needed to make a withdrawal before the CD matures.
Another option that might be more amenable to someone without large amounts of cash is a high-interest savings account. Usually offered by online banks, these offer interest rates that are substantially above what’s advertised in the local bank down the road. A quick check found that many national brick and mortar banks were paying 0.01% interest while online banks were in the 0.50% interest range. Neither is a great rate but investigating online options might be worth your time.
While you’re researching your options, make sure to understand any account minimums you must maintain to avoid monthly fees along with the fee schedule for overdrafts or surpassing the six “convenient” withdrawals. Remember too – there’s no rule that says you can’t have more than one type of account. Some may choose to have $1,000 in a savings account attached to their checking account just in case, and have the majority of their savings in a high interest online account or a money market account.
Photo by Towfiqu Barbhuiya