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SmartAsset: 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 which 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 smart 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. For example, in October 2022, the average money market account paid 0.23%, while the average savings account paid 0.21%. This is a small but real difference that is typical.

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 up side to a money market account is savings account interest with direct access to your money. The down side is twofold. First, money market accounts have to obey the same transaction limit regulations as a savings account. 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?

SmartAsset: Money Market vs. High-Yield Savings

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 down side 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, 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.

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

SmartAsset: Money Market vs. High-Yield Savings

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. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one 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.

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Eric Reed Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
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