Savings vs. money market accounts

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Savings vs. money market accounts: what you need to know

Finding a safe place for your money used to be simple. Your bank offered a checking account for day-to-day expenses and a savings account to sock a little extra away for a rainy day. Today, things are a bit more complicated, but that complexity gives you more options for your savings.

The two most common savings vehicles offered by most banks are savings accounts and money market accounts. While there are technical distinctions between the two types of accounts that govern how banks use the money in each, the overall differences aren’t that large. They both offer safe, convenient ways to keep savings for emergencies, short-term goals or otherwise. 

It’s important to note money market accounts offered by most banks are different from money market mutual funds, which are investment vehicles that aren’t insured by the Federal Deposit Insurance Corporation (FDIC) and could potentially lose value.

However, bank savings and money market accounts are FDIC-insured, which means your money is protected by the federal government up to a certain amount. These deposit accounts also have restrictions on how much you can withdraw within a set period, unlike a checking account.

Savings or Money Market Account:  Which one to choose

Where should you put your money? Consider these factors:

Access: Money in both savings and money market accounts can be accessed through electronic fund transfers or ATMs. While neither will have access to the money through debit cards or online bill pays, money market accounts often add an additional layer of convenience by allowing you to tap funds using checks.

Limitations: Both savings and money market accounts have limits on the number of monthly withdrawals or transfers you can make. Under federal regulations, you’re permitted to make a maximum of six per statement cycle, but banks vary on the number of infractions allowed.

At Nationwide, we charge a $5 fee per transaction after you exceed the six-per-month limit. If this happens three times within a 12-month period, your money market is switched to a checking; for savings, we automatically close your account. You’ll be just fine though if you stick with your checking account for day-to-day purchases, paying bills, etc. and reserve your money market or savings account for its original purpose: to tuck away money for the future!

Minimum deposits: The minimum required to open a savings or money market account varies from bank to bank, but money market accounts will most likely require higher minimum deposits than the savings accounts.

Interest rates: Money market accounts may offer slightly higher interest rates than traditional savings accounts, but their rates may fluctuate more often. Still, rate increases or decreases are typically small.

Savings strategies using these accounts

With these differences in mind, there are a few savings strategies you should consider:

Read the fine print: The rules and restrictions for savings and money market accounts vary from bank to bank. Be sure you know the minimum deposits, interest rates and limitations on withdrawals (as mentioned above) before opening an account. Be wary of fees such as “account maintenance” that could eat away at your nest egg.

Do both: If you can meet the minimum deposit required for the money market account, take advantage of its typically higher interest rate to start an emergency fund.  You’ll also be able to access it immediately by writing a check if needed.  If you’re worried about being tempted to withdraw money, take advantage of the (slightly) more limited access to funds in savings accounts to create a long-term savings fund and link it to your checking account to transfer funds only when needed. 

Help avoid overdraft fees:  If you have a checking account, consider having a savings or money market account with the same bank and “linking” them to the checking account.  Most banks will waive an overdraft penalty fee if you happen to exceed your checking balance by transferring funds from your linked savings or money market account to cover the overdraft. 

Also be sure to know the limitations of this overdraft protection for your bank. For example, there may be limitations by day or month, or some banks assess fees to automatically transfer the money from your savings/money market account to the checking account when the account is overdrawn.  So, linking accounts alone might not help you avoid all fees.

Look at other options: While interest rates on savings and money market accounts are at historically low levels, online banks, like Nationwide, may offer better rates for “high interest” savings accounts than traditional brick-and-mortar banks. Many banks offer interest checking accounts that pay comparable interest without the withdrawal limitations of a savings or money market account, although in most cases you’ll need to maintain a set balance to earn interest or avoid fees. 

Also, if you know you won’t need your money for a certain period of time, FDIC-insured certificates of deposit, or CDs, often offer higher interest rates than other savings accounts but have significant penalties if you withdraw funds before the time period is over.

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