3 Differences Between a Money Market Account and Savings Account

If you’ve been considering a money market account over an online savings account because of the slightly higher interest rates, then you may be confused as to the differences between them.  MMAs and savings accounts are very similar, but there are a few key differences you’ll need to know about if you open up an MMA.

In a traditional savings account, banks take your deposits and loan them out. A bank is able to loan out much more than it has in reserves.  This is because the Federal Reserve sets the amount of reserves a bank must keep on hand, which is usually between 3 and 10 percent of its deposits.

So, for every $100 you deposit, the bank can loan out between $90 and $97. Those loaned out dollars generally wind up in other accounts, and get loaned out again, creating much more economic activity than you might expect.

Banks loan money out at higher interest rates than those they pay depositors, and make their profit by keeping the difference.  Banks also generate profits through fees such as ATM fees, overdraft fees, account fees, etc. To meet reserve requirements, banks frequently make short-term loans to one another.

Money market accounts are a little bit different. They’re designed to compete with and mimic money market funds offered by brokerage firms. The money you deposit is invested in specific, short-term government and corporate securities in the money markets. These investments include Treasury bills, bankers’ acceptances, and certificates of deposit, among other lending instruments. The bulk of the money market involves banks lending to one another.

Here’s a look at the differences between the two accounts for the account holder.

(1) Savings accounts frequently come with the lowest interest rates paid to account holders. Their minimum balances are typically very low, as many banks offer savings accounts without any required minimums. You can typically make as many withdrawals as you like.

(2) Money Market accounts typically pay higher rates than savings accounts and certificates of deposit. Like savings accounts, they’re typically liquid accounts. That means your money isn’t tied up for a fixed length of time, as it would be in a certificate of deposit. But, your money market account is limited to six withdrawal or transfer transactions per month, and your bank is required to discourage you from exceeding this limit.

Generally, banks do this by charging heavy fees for withdrawals and transfers after number six. Banks often offer checks attached to money market accounts. Writing a check is usually counted against the maximum of six withdrawals per month. Some money market accounts even offer ATM access. (Whether or not ATM withdrawals count against an account holder’s monthly six is up to the bank.)

(3) The most crucial of differences is that in a money market fund, your deposits are not FDIC insured. This means that there is a slim chance that your dollars can lose value by investing in a money market fund. Most investors consider this risk negligible, and many consider money market accounts as save as savings accounts.

If you’re looking for a place to earn interest on your extra cash, a money market account is probably the place to stash it.  Shop around for an account with a competitive interest rate and suitable account minimums.  Make sure you understand the fee schedule.  The last thing you want to do is run into hefty fees because of one too many transactions.

Published or Updated: April 5, 2013
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

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