Money Markets vs. Savings Accounts
Money market deposit accounts and savings accounts are very similar, so how do you decide which account to get? There are 3 main differences between the two accounts that will help you decide what to choose.
What the bank can do with your money
When you put your money in a savings account the bank can use that money to loan it out to other customers who will then pay it back with interest. The bank keeps some of that interest, and will give some of that interest to you. With a money market, the bank is allowed to use that money to invest in things like CDs (certificates of deposits) bonds, treasury notes, etc. that are viewed to be slightly more risky than a loan. Again, they will keep some of that interest and give some of it to you. Regardless, your money is insured up to $250K so these are both very safe options.
The interest rate
Generally, savings accounts have a lower interest rate than a money market because the interest the bank makes from a loan is lower than what they might make from say a bond. Unfortunately, in our current economic climate, regardless of what option you take the interest rate will most likely be far below inflation (3-4%).
The opening deposit + minimum balance
A minimum balance is the lowest amount of money you can have in the account before getting charged with a fee. The minimum balance for a money market is usually higher than a savings. The required opening deposit is also higher for a money market than a savings. Some banks will have savings accounts with no minimum balance, which is great for people just starting to save.
Here’s the bottom line…
A money market deposit account is the better option if you can keep the minimum balance and have enough money for the opening balance because in return, you are getting a higher interest rate. However, if you don’t have much money to start with, find a bank that offers free savings accounts until you can work your way up to a money market.