High-yield savings vs. money market accounts: Which is better?
With an elevated inflation rate and the stock market testing the risk tolerance of investors, you may be wondering how you can both protect and grow your savings. Two account types that offer lower risk than the stock market and higher returns than traditional accounts are high-yield savings and money market accounts.
But what are the key differences between the two and which is better for you? In this article, we will break down exactly what you need to know.
How are high-yield savings accounts and money markets similar?
High-yield savings accounts and money market accounts have many similarities.
Deposit insurance
First, both account types are insured up to $250,000 per account by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Association (NCUA) when held at insured institutions.
Higher APYs than standard savings accounts
Next, they both come with variable annual percentage yields (APYs) that are higher than those offered with traditional savings accounts.
The average national APY on traditional savings accounts currently sits at 0.40% while money market accounts average 0.57%, according to the FDIC.
High-yield savings accounts aren't included in the FDIC report but a quick look around reveals APYs ranging from 3.50% and 4.50% — and up to 5% can be found with a bit of hunting.
It's also worth noting that while the national average APY on a money market account is 0.57%, many banks and credit unions are currently offering rates in the 3% to 5% range.
"Both pay interest at higher rates than traditional savings and checking accounts, and at present the rates for each are very similar, in the 4.0% - 4.5% range," says Chris Rivers, CFP, CRPC, and principal at Armstrong, Fleming, and Moore, Inc.
Check your high-yield savings account options here now and start earning more money!
Withdrawal/transfer limits
Another similarity between the two account types? Both can be subject to withdrawal and transfer limits under Regulation D.
Regulation D is a federal law that previously limited the number of monthly withdrawals and transfers you could make from a savings deposit account to six. If you exceeded the limit, your financial institution could charge you a fee or close/convert your account.
During the pandemic, the limit on savings deposit accounts was made optional and it has yet to be changed back. So, now banks and credit unions can decide whether or not your high-yield savings or money market account will have limited withdrawals or not. That's why it makes sense to look for an account with little or no fees.
Minimum required deposits or balances
With both accounts, your ability to earn the APY may hinge on meeting initial deposit or ongoing balance requirements. Again, try to look for an account where these requirements are not in play. Both account types can also come with monthly fees. It's important to pay close attention to any fees as they can quickly negate your interest earnings.
Account access
Financial institutions may offer ATM/debit cards and check-writing privileges with both types of accounts, granting you easier access to the funds.
How are high-yield savings accounts and money markets different?
As the name suggests, money market accounts pay interest based on the current interest rates in the money market — a marketplace of savings products and short-term funds.
With high-yield savings accounts, financial institutions typically use the money you deposit to make loans to other people and businesses.
Aside from that, the differences between the two boil down to account minimums and access to funds.
"High-yield savings accounts tend to have low minimums, but the trade-off is the cash is a bit harder to access, " says Rivers, "They generally require you link to a checking account, and transfer first to the checking account in order to withdraw cash."
He adds, "Money market funds, on the other hand, often allow direct withdrawals, through a debit card or check writing. Here the tradeoff is that money market accounts typically have higher minimum balances. Dip below the minimum and you may incur account fees."
When is a high-yield savings account better?
A high-yield savings account is typically best when you have less to invest but are planning to leave it alone in the account for the foreseeable future. "If you have a smaller amount to deposit, and/or you're comfortable not touching the money for a while, the high-yield savings account can be a good option," says Rivers. Learn more here.
When is a money market account generally better?
Conversely, Rivers explains that a money market account can be better when you have more to invest and need regular access.
The bottom line
When looking for a low-risk account for your savings with decent returns, it's not a bad idea to explore both money market and high-yield savings accounts.
While money market accounts are known for higher deposit limits and easier access, competition has driven lower account limits on money market accounts and greater access to funds with high-yield savings accounts.
"By comparing interest rates, fees, and account benefits, you can make an informed decision on the right account type for your unique financial situation," says Markia Brown, a Certified Financial Education Instructor & Registered Financial Associate at Money Plug, LLC.
She adds, "Interest rates on high-yield savings accounts and money market accounts can also change over time. Monitor your account's interest rate and be prepared to switch to a different account if you find a more competitive rate elsewhere."
