Is a money market account better than a savings account?
These two types of accounts commonly earn similar, yet different, interest rates. Money market accounts tend to earn higher rates, and here's why. Traditionally, money market accounts have offered higher interest rates as a reward for the higher initial deposit amounts required to open the accounts.
Many accounts have monthly fees
Another drawback to remember is that while they have high yields, money market accounts can also come with cumbersome fees. Many banks and credit unions will impose monthly fees just for the upkeep of your account.
The other difference is that savings accounts are generally much easier and less expensive to open. Many savings accounts have no or low minimum balances and low or no fees. Many money market accounts have much higher minimum balance requirements and monthly fees.
A money market account is an interest-bearing savings account that offers a higher-yield interest rate, allowing you to earn faster than a traditional savings account.
Both money market accounts and savings accounts at banks and credit unions protect you in case your bank goes under—this includes neobanks and brick-and-mortar banks. Both the Federal Deposit Insurance Corporation and the National Credit Union Administration will cover your deposits all the way up to $250,000.
Savings accounts are usually a safe place to keep your savings. Like a money market account, they are often insured through the Federal Deposit Insurance Corp. (FDIC) or National Credit Union Association (NCUA) up to $250,000 per account holder.
Money market accounts tend to pay you higher interest rates than other types of savings accounts. On the other hand, money market accounts usually limit the number of transactions you can make by check, debit card, or electronic transfer.
Some money market accounts come with minimum account balances to be able to earn the higher rate of interest. Six to 12 months of living expenses are typically recommended for the amount of money that should be kept in cash in these types of accounts for unforeseen emergencies and life events.
Money Market Funds
Ultra-conservative investors and unsophisticated investors often stash their cash in money market funds. While these funds provide a high degree of safety, they should only be used for short-term investment. There's no need to avoid equity funds when the economy is slowing.
Some people choose money market accounts over savings accounts because they offer higher interest rates. While the difference in earned interest can be small, it might be enough to offset possible liquidity constraints posed by money market accounts, if you're are unlikely to need quick access to your cash.
How do I choose between savings and money market accounts?
Money market accounts have all the features of savings accounts but are dialed up a notch. In exchange for a higher minimum requirement, you'll generally score a higher interest rate—along with extra features like a debit card and check-writing access to your money.
Because you earn higher interest rates than with a traditional savings account, a money market account can be a great choice to set aside some emergency cash or start building your savings. And unlike a traditional savings account, you have more options for withdrawing your money when you want it.
I suggest a Money Market account with no penalties and full check-writing privileges for your emergency fund. We have a large emergency fund for our household in a mutual-fund company Money Market account.
Because they invest in fixed income securities, money market funds and ultra-short duration funds are subject to three main risks: interest rate risk, liquidity risk and credit risk.
Advantages of Money Market Accounts
Federal regulations that govern savings account withdrawals don't apply to ATMs. So you can make unlimited ATM withdrawals from your money market account without penalty. Many banks also let you to write a limited number of checks from your money market account.
Cash equivalents are financial instruments that are almost as liquid as cash and are popular investments for millionaires. Examples of cash equivalents are money market mutual funds, certificates of deposit, commercial paper and Treasury bills. Some millionaires keep their cash in Treasury bills.
When saving for a financial goal, it's important to make sure you're utilizing the most beneficial investment type for your goal based on its time horizon. Money market funds make the most sense for short-term goals and generally should not be used for long-term investing, such as retirement.
So, your money is never really stuck. However, MMAs sometimes charge small penalties if your balance drops below a certain amount or you make more withdrawals than agreed. So, you may withdraw your funds at any time, but some withdrawals can lower your money's earning potential.
Which Bank Gives 7% Interest Rate? Currently, no banks are offering 7% interest on savings accounts, but some do offer a 7% APY on other products. For example, OnPath Federal Credit Union currently offers a 7% APY on average daily checking account balances up to and under $10,000.
The average money market rate is less than 1 percent. But let's say you put $10,000 in an account that earns a full 1% APY. After a year, your balance would earn 100 bucks. Put that same amount in a money market account with a 4% APY, and it would gain just over $400.
Who typically uses a money market account?
For the most part, money markets provide those with funds—banks, money managers, and retail investors—a means for safe, liquid, short-term investments, and they offer borrowers—banks, broker-dealers, hedge funds, and nonfinancial corporations—access to low-cost funds.
It might be worth investing in a money market account when you want a safe place to store your money with a higher interest rate than a checking account, while still having some liquidity features such as check writing. It's ideal for emergency funds or short-term savings goals.
Rather than more favorable capital gains rates, you'll owe regular income taxes on money market fund earnings, with a top bracket of 37%. By comparison, the top long-term capital gains rate is 20%.
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