11/11/2022
It is common for many people to confuse certain financial terms because they are not used to managing every little detail of their money. This confusion can arise between savings accounts and money market accounts (MMA), whose characteristics tend to be very similar.
In this article we will see what the differences between them are and in which cases one type is more interesting than the other.
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What are savings accounts?
Savings accounts are basically demand deposits that allow you to withdraw and deposit money without maturity dates or penalties. This money is normally used by the bank to grant loans to other customers and, in exchange, offers you a return in the form of interest.
What are money market accounts?
Money market accounts are very similar to savings accounts, however the bank usually uses the money deposited in them to invest in the stock markets.
These accounts often offer higher yields and the ability to write checks and withdraw cash at ATMs using a debit card.
What interest rates apply to each type of account?
Money market accounts offer, by their nature or promotion, higher interest rates than savings accounts. They are often referred to as high-yield accounts.
It is currently possible to find money market accounts that exceed 2% APY.
What conditions apply to savings and money market accounts?
Because of their promotion, people think of MMAs as more sophisticated products than regular savings accounts. This perception drives banks to impose a higher initial deposit amount, restricting the public that can access them.
This often happens when the account has a higher interest rate than usual. The institution may even charge you a monthly or annual fee to give you the opportunity to sign up for a money market account.
We see this condition in a large number of banks, but it does not mean that there are others that offer them without such limits or fees. That is why it is important to compare and know the fine print before signing up for any product.
Savings accounts, on the other hand, do not usually apply commissions or annual fees, and when they do, are easy to avoid. They may also apply a minimum deposit to contract them, but it is not usually high.
What are the withdrawal limits for each one?
By law, the U.S. government considers both savings and money market accounts to be deposit accounts. Since banks treat them the same, they are not intended for frequent withdrawals or transactions.
According to Regulation D, you are only entitled to make 6 preauthorized withdrawals each month. This applies to check, online transfers and debit card transactions, but not to teller or ATM transactions.
Are they FDIC insured?
Both savings and money market accounts are categorized as deposit accounts, which means they must be automatically insured by the FDIC. This is also true for certificates of deposit, bonds and checking accounts.
That is why it is important to check that the bank you are going to choose is affiliated to this institution, which covers your losses up to $250,000 USD.
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In this sense, these instruments should not be confused with the so-called money market mutual funds or money market funds, which are not insured by the national government.
These funds are riskier investments whose dividends are subject to economic indicators. They are more common in investment firms and allow you to buy/sell stocks to invest in highly liquid assets.
Do they allow you to write checks?
There are banking institutions that give you the ability to write checks with money market accounts, if you find that you need this instrument for your personal or business finances. Although this may be true for some banks and not for others, the limit of 6 transactions per month does not change for having this privilege.
The basic difference is related to the penalty, which is a commission when you exceed the limit of transactions. There are some entities that might close your savings or money market account if you default 3 times in the last 12 months or might threaten to eliminate it if you go over the limit just once.
At their core, savings and money market accounts are very similar. Perhaps their most notable differences are a relatively higher interest rate and the ability to get a checkbook. Otherwise, they can be considered identical in their operation.
Español: Cuentas de ahorro vs cuentas de mercado monetario (money market)