The Real Difference Between Savings Accounts And Money Market Accounts

Without an understanding of key financial concepts, it's harder to make smart decisions to support your long-term financial goals. When it comes to putting extra money aside, interest-earning accounts are a popular way to go, but not all accounts are equal or achieve the same purpose. Two main types, savings and money market accounts, are often mistaken for one another, but there are important differences between them. 

A savings account is one of the most common types of bank accounts that allows deposited funds to earn interest. While there are different subtypes of savings accounts — like high-yield savings accounts — the average savings account with a traditional bank is characterized by federal deposit insurance of up to $250,000, limited withdrawal access, and an annual interest rate. However, due to factors like inflation and the low interest rates offered by most banks, a regular savings account is one of the worst places to grow your savings.

On the other hand, money market accounts combine the features of a savings account with those of a checking account. These accounts come with their own set of rules, which may include checkbook and debit card privileges, withdrawal limits, and in some cases, a minimum deposit. However, they share traditional savings account features like the federal deposit insurance and the ability to earn interest on the account balance, further blurring the lines between savings and money market accounts.

The biggest difference between money market accounts and savings accounts lies in the ease of access. Money market accounts are designed as hybrid accounts — cash is readily available like a checking account, but it also earns interest, like a savings account. In most banks, money market accounts are linked to a debit card and come with the ability to write a check, allowing easy access to funds. In contrast, the primary purpose of a savings account is to preserve the cash deposited, and so it hardly ever comes with check-writing capabilities. However, with some banks, you can get a debit card to withdraw cash from your savings via an ATM withdrawal. 

Account requirements draw another line of distinction. Many money market accounts require a minimum balance,  which can vary from as low as $10 to as high as $5,000. For a savings account, requirements aren't as strict, with most banks having minimal account opening fees and some requiring no balance at all.

At first glance, interest rates are a common feature, but a closer look reveals that the interest rates for money market accounts are typically slightly higher than those for savings accounts. According to NerdWallet, the national average yield for a regular savings account is 0.40%, while the average yield for a money market account is 0.59%. The margin between the two accounts might be slight, but it can make all the difference in achieving your financial goals.

The decision to keep your funds in either a money market account or a savings account comes down to your priorities. If your main goal is to set aside cash for regular use, a money market's debit card and check-writing features offer more flexibility. But if you're saving money for a specific purpose — like an emergency fund or a large purchase — a savings account might be the more stable and secure option. Each account type has its downsides, which are important to weigh before making a choice.

Money market accounts may come with slightly higher interest rates, but those rates can fluctuate and are usually tied to a minimum balance. For instance, First Internet Bank of Indiana offers a money market account with a tiered interest rate of 3.61% on accounts with a balance of $1 million or less and 4.42% on balances over $1 million. With most savings accounts, you earn interest compounded either daily, monthly, or yearly, regardless of your account balance. 

If your financial goals involve actually growing your savings, the option of high-yield savings accounts slightly changes the picture. Typically offered by online banks, they offer APYs as high as 4% and are better suited to combating inflation, as you're unlikely to lose money in a high-yield savings account compared to a standard one. Money market accounts with less than 1% average APYs do little to combat inflation, nor does the ease of withdrawal help tackle impulse spending effectively.