Here is what I’ve learned about the difference between money market accounts and plain old savings accounts.

Saving accounts, as most of us know, are accounts where your money earns interest.  Money in savings accounts are not tied to credit or debit cards, or checks.  However, you can make an unlimited amount of withdrawals and transfers from that account.  Sometimes there are fees for maintaining a savings account, or a required minimum balance.  It depends on the bank, so be sure to shop around!  Interest rates for savings accounts are on the low side (the average interest rate is 0.77% ).

Money market accounts, on the other hand, have much higher interest rates.  When you put your money into a money market account, the bank uses to money to pay out loans to other customers, on which they collect high interest rates.  In turn, some of those interest earnings are transfered to you, in the form of interest on your account.  Sometimes banks offer these kinds of accounts primarily online, which allows them to offer higher rates as well.  Rates for most money market accounts are within 2% and 3%, although some offer even higher rates.  Some banks will offer different levels of interest based on your account’s balance, or will offer higher introductory rates for the first few months.  Money market accounts always have a minimum balance requirement, but they vary drastically depending on the account.  They can be as low as $1 and as high as $2500.  Another great benefit of money market accounts is that interest is usually compounded daily (rather than monthly or yearly), so your money grows even faster.  Also, you can write checks from money market accounts.  The only downside is that there is a limit of how many withdrawals or transfers you can make from this type of account per month, usually 3-6.  However, if you’re in it for the long haul and interested mostly in saving money and earning interest on what you already have, that shouldn’t be a big problem.  Even if you eventually have to use it to pay for school or something, it shouldn’t be too much of a problem.  I’d reccommend budgeting out how much you’ll need from that account for the month for whatever you’re funding and transferring it all at once into a different account.

Overall, savings accounts are fine for small savings or if you’re not interested in interest (pun intended) or just want to use it as emergency funds.  But if you’re looking to get more bang for your buck or save copius amounts for school or another big expense, money market accounts are the way to go.  Be sure to research many options before you decide where to put your money!

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3 thoughts on “The Language of Finance, Pt. II: Savings vs. Money Market Accounts

  1. Erm, well, most savings and money market deposit accounts fall under the umbrella of Regulation D of the Federal Reserve, limiting the amount of transfers you can make; specifically no more than 3 by check monthly from the MMA. Plus, it is good to distinguish between money market deposit v. money market fund accounts which the latter are typically uninsured and carry risk.

    And you’d be hard pressed to find a money market deposit account greater than 2.25% that is NOT a jumbo rate.

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