Savings accounts and money market accounts are different from each other practically in name only. From a saver’s perspective, there is no difference between these types of accounts. There are many misconceptions about the supposed differences between savings accounts and money market accounts, and if you’ve ever tried to learn about these differences online, even from reading major banking industry websites, you may have received a great deal of misinformation.
I am not infallible; if you believe any of the information included below to be incorrect, let me know.
Whether you open a savings account or a money market account at a bank in the United States, the bank applies your cash to their books as an asset and records a liability in the form of your deposit. The government considers both savings accounts and money market accounts as deposit accounts, not transaction accounts. Savings and money market accounts are not meant for frequent transactions. They are both limited by Regulation D, a Federal Reserve Board regulation that indicates that customers may make only six pre-authorized withdrawals from deposit accounts. ATM and teller withdrawals do not count against this limit, but debit card transactions, checks, and online transfers do. You may have read in various places online that only money market accounts are limited to six withdrawals, or you may have read that only savings accounts have this limitation. The limitation applies to all deposit accounts.
Money market accounts may offer higher interest rates, but not necessarily. This list of high-yield savings interest rates includes money market accounts and savings accounts, and the rates across banks don’t prove the hypothesis that money market accounts have higher interest rates in general. When the same institution offers money market accounts and savings accounts as separate products, the money market account often has a higher interest rate. Even this isn’t consistent from bank to bank. For example, some banks offer a “high-yield savings account” as well as a traditional savings account, and this more impressive-sounding product might provide a higher interest rate at that institution than all other products.
Banks may assess higher fees and minimum deposit amounts for money market accounts. Because customers perceive money market accounts as more sophisticated than savings accounts, banks often limit customers to a select audience by requiring a higher initial deposit amount, particularly when the benefit of choosing this type of account includes a higher interest rate. Furthermore, the bank may charge a monthly or annual fee for the privilege of owning this type of account. While fees and high minimum deposits are common, many banks offer money market accounts for free. Shop around and read the fine print before you commit.
Banks often offer check-writing privileges for money market accounts. Some do and some don’t. Money market accounts are deposit accounts, which means customers may make only six withdrawals per month as described above even if the bank provides a checkbook. Banks differ in how they penalize customers who exceed six withdrawals per month. In most cases, there is a fee for each withdrawal over the limit. Some banks, like ING Direct, threaten to close your account if you exceed the limit. While banks offer checks for money market accounts, some could, in theory, offer checks for savings accounts if they desired. Most do not.
You don’t even need an official document from the bank (or a mail-order check designer) to draw a check on an account — any piece of paper with your account number, your bank’s name and routing number, the amount, the name of recipient, and your signature will do. You may not even need to include your account number and bank’s routing number in some cases. It might be difficult to find someone to accept a check written with a felt-tip pen on a cocktail napkin without a hassle, but courts have ruled in the past that a hand-written document intended to function as a check is considered a legal form of payment. Thanks to the Check 21 Act, paper checks are even less a part of the payment process than they were throughout the twentieth century.
Money market accounts and savings accounts are FDIC insured. FDIC insurance doesn’t come automatically, but it is available for all types of deposit accounts held at banks located within the United States. This includes savings accounts and money market accounts. More misinformation online states that money market accounts are riskier and could “break the buck” — drop in value. This is true for money market funds or money market mutual funds, not money market accounts or money market deposit accounts. Money market accounts can be insured by the FDIC just like savings accounts and certificates of deposit. Always check the bank’s website to confirm that the bank is covered by FDIC, and if you are unsure, search for the bank using FDIC’s own Bank Find tool.
If the institution offering savings accounts or money market accounts is a credit union rather than a bank, the insurance comes from the National Credit Union Administration (NCUA). This coverage is effectively the same as FDIC insurance.
Money market funds: not savings accounts and not money market accounts
Money market funds — some institutions go so far as to confusingly call these “money market fund accounts” — are not FDIC or NCUA insured. The money market fund product is often offered by both banks and brokerages. Banks use the customers’ money to invest in low-risk securities, like government or municipal bonds with short maturities. This differs from both savings accounts and money market accounts, with which banks use deposits garnered to lend to other customers. With money market funds, the bank hopes to earn more from the bonds than it pays out to investors. A money market fund is an investment vehicle, not a form of savings, though it is almost as safe as an insured deposit account. There was concern a few years ago during the economic crisis that money market funds would break the buck, but for the most part, investors were safe even during the worst financial crisis of the past few generations.
Investors in money market funds are subject to a management expense ratio and possibly fees that reduce the net return.
The differences between savings accounts and money market accounts are negligible, and most are due to differences created by banks, not inherent in the products overall. Regardless of the name a bank gives its savings products, read the terms of conditions to determine how you may use the account, understand any fees they may charge you, and be aware of the penalties for not abiding by the terms.
Updated August 25, 2011 and originally published May 31, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @flexo on Twitter and visit our Facebook page for more updates.