Money market account vs high yield savings account

With interest rates on the rise and a possible recession looming, it might be time to prioritize saving.

If you’re exploring strategies for keeping your cash safe from market turmoil and accessible for paying bills or covering emergencies, a money market account is worth considering. These risk-free deposit accounts have the earning potential of a savings account and the convenience of a checking account. 

A money market account “may be a good solution for those who want the higher interest rate of a savings account but want the flexibility to write checks,” says Michelle Riiska, a financial planning services consultant at eMoney Advisor, a wealth management platform owned by Fidelity. Some banks require balance minimums to earn the higher interest rate, but many—especially those that operate exclusively online—don’t.

Here’s how money market accounts compare to other savings products and what features to look for when you’re shopping for one.

How to get the best money market and savings rates

What is a money market account?

A money market account is an interest-bearing bank account. At the end of the day, it looks and functions very much like a savings account, but with a few distinct features of a checking account, explains Ken Tumin, a senior industry analyst at LendingTree and the founder of DepositAccounts.com. “It’s up to the banks, sometimes, how they define it,” he says.

A money market account will usually have some combination of the following features:

• A higher interest rate than the checking account at the same bank
• FDIC insurance
• Check-writing capabilities
• A debit or ATM card
• A minimum balance requirement
• A monthly withdrawal limit
• Monthly maintenance or service fees

Here’s how a money market account compares to other types of bank accounts. 

Money market accounts vs. savings accounts

Money market accounts tend to be more accessible than savings accounts. They often come with a debit or ATM card and a checkbook so you can pay others or make direct withdrawals yourself, instead of having to transfer money to a checking account first. But how frequently you can make withdrawals or transfers depends on the individual bank’s rules. 

The Federal Reserve used to limit withdrawals and transfers from savings products, including money market accounts, to six per month. The Fed scrapped that rule during the pandemic and now lets banks decide whether to limit withdrawals or not. It’s not uncommon for a bank to set a monthly limit and charge a fee for each additional withdrawal or transfer.

In terms of interest rates, money market accounts and so-called high-yield savings accounts pay about the same on your balance—which is to say, much more than a checking account. Online banks as of late October were offering top rates of 3% or more on money market and savings accounts, while typical checking accounts earned less than 1%, according to DepositAccounts.com data.

Money market accounts vs. checking accounts 

Checking accounts are the most accessible place to keep your money, aside from that shoebox under your bed. “Most people use a checking account for day-to-day finances like paying bills, writing checks or taking out cash. Because of the low interest rates usually associated with checking accounts, they are not the most efficient place to keep large balances over the long term,” says Brian Walsh, a financial planner at the online bank and lender SoFi. 

Money market accounts, like savings accounts, are designed to keep your money safe—and even growing—for longer than a few weeks or months. As such, a bank will pay interest on your balance as a way of enticing you to park your money there.

The ideal setup, Walsh says, is to use a savings or money market account in conjunction with a checking account to “manage your cash flow and short-term savings needs.”

Money market accounts vs. CDs

While still a savings product, certificates of deposit, or CDs, have a distinct difference when it comes to accessibility. A CD may offer a higher interest rate than a savings or money market account, but earning that return depends on locking up your money for a fixed period of time. The longer you leave your money untouched, the higher your interest rate, generally.

Money market accounts, by contrast, let you deposit and withdraw your cash with relative frequency.

Money market accounts vs. money market funds

Money market accounts are deposit accounts, while money market funds are investment products. A money market fund is as low risk as an investment can get, but it’s still not as safe as a deposit account.

The Federal Deposit Insurance Corporation, or FDIC, insures money market, savings, and checking accounts, as well as CDs, up to $250,000 per account holder, per ownership category, per bank. That means you won’t lose your money if the bank goes under—while unlikely, it’s peace of mind you don’t have to pay extra for. 

A money market mutual fund invests your cash in low-risk U.S. Treasury securities. These funds are most commonly used as containers to briefly hold cash before making an investment. Since money market mutual funds are actively managed, there’s a fee you have to pay that eats into your returns.

Will money market rates go up in 2023? 

The Fed has hiked interest rates several times this year in an effort to tamp down inflation. When the federal-funds rate moves, so too does the rate on money market accounts and other deposit accounts, as banks reward savers for helping them keep their coffers full.

Given the persistence of inflation in the U.S. and around the world, Tumin predicts the Fed could raise rates to a level of 4% or more by the end of the year. “Online savings accounts and online money market accounts often track pretty close to that range,” Tumin says. “It might take a while, a little lag, but they often will trend towards that rate.” Legacy or bricks-and-mortar banks tend to offer lower rates overall and react slower to Fed adjustments, he adds.

Money market account terms to know

Here are the most important features to know and compare when you’re shopping for a money market account.

Annual percentage yield, or APY

This is the rate of return on your balance, including compounding, over the course of a year. Banks either compound interest daily or monthly. However, APY typically changes several times a year—plus, your balance will likely fluctuate as you deposit or withdraw funds—so the actual amount of interest you earn won’t be the sticker-APY you see when you open the account.

Deposit

Some banks let you deposit cash into your money market account via ATMs, while others only accept electronic transfers from other bank accounts.

Fees

Monthly maintenance or service fees have become less common with the surge in online banking, but they’re still levied by many legacy banks. In some cases, you can avoid these fees by maintaining a certain balance or opting out of paper statements.

Withdrawal limit

Banks must disclose withdrawal limits—the number of times per statement period that you can take out cash or electronically transfer money from the account—upon account opening and anytime the terms of the account change. By law, a bank can’t impose a monthly withdrawal limit less than six on savings or money market accounts.

Minimum deposit requirement

An account with a minimum deposit requirement means you have to fund it with a certain amount of money in order to open it. These minimums vary, so shop around to find the level that meets your needs.

Minimum balance requirement

How much money you need to have in your account at any given time to avoid fees or account closure is up to the bank itself. Sometimes banks will have no minimum balance requirement, but only pay interest once your account hits a certain dollar amount. These are called rate or balance tiers, Tumin says, wherein larger balances “get rewarded with a higher rate.”

FDIC insurance

Money market accounts are automatically insured up to $250,000 per account holder, per ownership category, per bank (you can check your insurance status using this calculator). For example, you can have $250,000 in an individual money market account, and $250,000 in a joint savings account at the same bank and be fully insured. The FDIC insures more than 4,700 financial institutions—you can use this tool to check a bank’s membership status.

Debit or ATM card

Some money market accounts let you access your money through ATM withdrawals, which require an ATM card. Some go a step further and give you a debit card, which you can use to take out cash at an ATM or make purchases at shops, restaurants, and other merchants. Check if the bank charges any fees to use these cards.

Check writing

Some money market accounts let you write checks, just as you can with a checking account. Bear in mind, however, that a cashed check may apply to your monthly withdrawal limit.

How to use money market accounts in your portfolio 

Whether you’re shoring up an emergency fund, saving for a large purchase, or just want to earn some interest on your everyday cash without risking it in the stock market, a money market account is a reliable money-management tool. 

“If we go back to basics on investment principals, cash is cash. It’s not designed to be the part of your portfolio that grows,” Autumn Lax, an Austin, Texas-based financial planner at Drucker Wealth.

Some banks only offer money market accounts or savings accounts—not both. If you’re on the fence about which type of account to open because you’re not necessarily looking for check writing or a debit card, try narrowing down your choices by picking a few credit unions or banks that you trust, and then comparing what they have to offer. 

“The more important decision to consider is determining the right amount of cash to have, not so much where you hold it,” Lax says.

The advice, recommendations or rankings expressed in this article are those of the Buy Side from WSJ editorial team, and have not been reviewed or endorsed by our commercial partners.

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