Money Market vs. High-Yield Savings

Money market accounts and high-yield savings accounts are broadly similar. Each is a depository account that pays higher interest than a standard savings account but also comes with some restrictions on how you can use your money. With a money market account, you’ll have easier access to your cash but will have more fees and balance limits. High-yield savings accounts make it a little harder to access your money, but they’re also usually cheaper. Here’s a comparison of both.

A financial advisor can help you make savings and investment decisions for you financial plan.

What Is a Money Market Account?

A money market account is a hybrid bank account. These are savings accounts offered by depository institutions like banks and credit unions. That means that they store money, pay interest and are insured by the FDIC. However, they also share some characteristics of a checking account. Specifically, a standard money market account will come with a checkbook and an ATM card. This lets you spend money directly from your money market account, a feature that savings accounts don’t have.

A money market account pays around the same rate of interest as a standard savings account, although most give a slightly better return. Money market accounts can pay the same rate of interest as a high-yield savings account. And while not impossible, it is rare, if ever, that a standard money market account will pay that kind of return.

The upside to a money market account is savings account interest with direct access to your money. The downside is twofold. First, money market accounts have to obey the same transaction limit regulations as savings accounts. This means that you can only transfer money and/or write checks up to six times per month from this account. This makes them ill-suited, if not impossible, for functions like ordinary bill paying.

The exception to this is ATM withdrawals, which are unlimited for most money market accounts.

Second, these accounts can have relatively high fees and minimum limits. You should expect account minimums of around $5,000 to $10,000, and some accounts will charge you a monthly maintenance fee as well. As a result, you end up needing to keep much more cash locked up in this account than with either an ordinary checking or savings product.

What Is a High-Yield Savings Account?

A high-yield savings account is a savings account that generates much more interest than a standard savings account. This means that these savings accounts earn higher interest rates than ordinary savings accounts. When comparing competitive rates, high-yield savings accounts can commonly collect between 0.5% and 3%.

So, as an example, if you put $10,000 into a traditional savings account that pays 0.01% in interest, then that compounded monthly interest would pay $1 annually. Comparatively, with all other factors remaining constant, a high-yield savings account paying 1% in interest would earn $100.46 in the same time period.

The downside to a high-yield account, however, is regulation and cost. Like a money market account, this is a savings product. Government regulation limits you to six transactions per month out of any kind of savings account. At the same time, very few banks give you direct access to funds in a savings account. You need to transfer money into a checking account, and then spend that money from checking.

Most high-yield accounts require you to keep a minimum balance, but this requirement has declined in recent years. Today you can easily find high-yield accounts that require you to keep as little as $1,000 on deposit, if anything. The same goes for monthly maintenance fees. While some high-yield accounts have fees of around $15 – $25 per month, banks are increasingly waiving this requirement altogether.

High-Yield Savings Rates by Bank

Differences Between High-Yield Savings and Money Market Accounts

Reviewing the pros and cons of money market accounts vs high-yield savings accounts a few key differences emerge. For new investors, the minimum balance requirements may be the largest disparity between the two. If you’ve got several thousand in savings and are looking to make a move, then a money market account is an option. However, if you’re just starting out on your savings journey and don’t have much capital a high-yield savings account is where you can start.

Another key difference is access. Money market accounts come with debit cards and checks, familiar tools for getting cash we’ve all grown accustomed to. By contrast, the transfer-only nature of high-yield savings accounts may be a source of frustration for account holders, particularly during high-stress periods when they need money fast.

Here’s a deeper breakdown between the two:

Pros and Cons of High-Yield Savings Accounts

• Typical Fees and Minimums
  • Minimum balance: Most banks often accept $0 to start.
  • Monthly fees: Usually none, but some banks do charge fees if you fall below a certain balance after a set period of time.
  • Excess withdrawal fees: Monthly transaction limits per federal law.
• Pros
  • Better for pure saving: Dollar-for-dollar, you are better off depositing money in a high-yield savings account than you are in traditional savings accounts because of better interest rates.
  • Consistency: The APY is tied to the Federal Reserve rate you can depend on consistent returns that track with any changes automatically.
  • Low or no fees: Because banks are competing for your money, most offer high-yield savings accounts with very low monthly maintenance fees or even no fees at all.
  • Low minimum balances: You can open accounts at most major banks with no deposit minimum, making it easy to sign up and get started.
• Cons
  • Limited withdrawals: Federal law restricts depositors from making more than six withdrawals a month from these types of accounts, though there is some flexibility.
  • Weak investment vehicle: While high-yield savings accounts are a great alternative to traditional accounts, the returns are not as strong as you’d see with traditional investments in stocks or mutual funds. If your goal is to maximize growth on your returns then this isn’t the best choice.
  • No check-writing or debit card: Accessing your funds isn’t as convenient as you’d think in the modern banking age. There’s no debit cards or checks attached to the account.
  • Transfer delays: The only way to access funds is to arrange a transfer to another account or request a check from the bank, which can take a few business days. This can be an issue if you need money in an emergency.

Pros and Cons of Money Market Accounts

• Typical Fees and Minimums
  • Minimum balance: Typically $1,000 or more to open an account, though some banks may accept less.
  • Monthly fees: Can range from $5 and up, but many accounts are willing to waive these fees if you meet certain balance requirements.
  • Transaction fees: Exceeding the withdrawal limit may result in fees so plan accordingly.
• Pros
  • Strong interest rates: Like high-yield savings accounts, money market accounts offer better interest rates than traditional savings accounts.
  • Lower risk and shorter timeframe: Money market accounts can be a bellwether against market volatility, offering predictable returns on a shorter timeframe than other investment vehicles like stocks and bonds.
  • Instant access: Money market accounts come with checks and debit cards that allow you to withdraw money at a moment’s notice.
• Cons
  • Balance requirements: Money market accounts often require high minimum balance thresholds that can be challenging to maintain if you have an emergency, resulting in costly fees.
  • Fees can add up: Balance fees and service fees on some accounts can add up quickly and diminish returns that are already low compared to other investments.
  • Low growth over time: Similar to high-yield savings accounts, money market accounts offer a great alternative to traditional savings but in the long-term tend to underperform against stocks, mutual funds, etc. If growth is your goal then money market accounts aren’t the best choice.
  • Limited transactions: Usually limited to six withdrawals per month, including debit and check transactions. This can also incur fees that erode your returns.

Which Is Right for You?

While any financial product can be complicated, the core difference between a money market account and high-yield savings is flexibility vs. return. A money market account gives you more access to your money in the form of direct checking and ATM withdrawals, but it will generally provide a lower interest rate. A high-yield savings account pays a much higher interest rate, but you have transfer limits and few, if any, accounts let you directly spend money.

Money market accounts also tend to tie up more of your money, requiring higher minimum account balances than a high-yield savings account. While both accounts can come with monthly maintenance fees, it’s increasingly easy for consumers to find no-fee accounts.

Ultimately, the right product is a highly individual decision based on personal financial factors. That said, with the current banking environment, high-yield savings accounts will probably be the right answer for most consumers. These accounts can offer significantly more interest with a significantly lower minimum balance requirement.

While a high-yield savings account doesn’t have the flexibility of a money market account, the withdrawal limits mean that you will almost certainly need a companion checking account either way. So most consumers will probably be better off taking the higher interest rate of a high-yield savings account and just spending their money from checking as needed.

Bottom Line

A money market account is a form of savings account that pays you interest rates a little bit higher than a standard savings account, while offering more flexibility to access your cash. A high-yield savings account pays significantly higher rates of interest than a standard savings account, while requiring the same restrictions on cash.

Financial Planning Tips

• A financial advisor can help you balance your savings and investment goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you are comfortable locking in your money for a set period of time to get a higher APY, you can also look into investing in CDs with high rates.

Photo credit: ©iStock/shapecharge, ©iStock/Vesnaandjic, ©iStock/kate_sept2004