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Yields on money market funds and high-yield savings accounts have risen sharply over the last year-in-a-half in response to Federal Reserve benchmark interest rate hikes. Investors can now earn decent returns on savings accounts and other short-term investments after years of rates sitting near zero.
High-yield savings accounts and money market funds are two options investors often consider to create an emergency fund or park cash earmarked for a short-term goal, like buying a car.
While both offer perks, including easy access and stability, there are some key differences to be aware of between money market funds and high-yield savings accounts. Here’s what you need to know.
What is a high-yield savings account?
High-yield savings accounts are generally available through online banks and offer higher rates of interest than traditional bank savings accounts.
The national average savings account pays a 0.58 percent APY as of November 2023, according to a recent Bankrate survey, while the best high-yield savings accounts come with interest rates above 4.3 percent.
High-yield savings accounts function similarly to traditional savings accounts and may limit the number of withdrawals you can make in a month. They’re also FDIC-insured, which means you’re covered up to $250,000 per account holder if your bank fails.
What is a money market fund?
Money market funds are short-term investments offered by banks, brokers and mutual fund companies that invest in short-term securities such as certificates of deposit, U.S. Treasury bills and commercial paper. Money market funds aim to maintain a share price of $1. There have only been a few instances where a fund fell below that level, or “broke the buck,” but the funds are not guaranteed.
Yields offered by money market funds depend on the current interest rate environment and tend to respond quickly to Fed policy. Money market funds can be a nice way to earn a return on your short-term savings, but aren’t likely to build significant wealth over time.
Be sure to pay attention to a money market fund’s expense ratio, which is the fee charged by the fund. This comes out of the return you earn as an investor, so it’s better to have low fees, all else being equal.
Many investors confuse money market funds with money market accounts. Money market accounts are products offered by banks or credit unions as a savings tool and come with FDIC insurance, whereas money market funds are not FDIC-insured.
High-yield savings accounts vs. money market funds
High-yield savings accounts and money market funds both present solid choices when it comes to investing your savings. Here’s what to know about each:
| High-yield Savings Accounts | Money Market Funds |
|---|
| Are you able to access your money? | Yes, but may be limited to a certain number of monthly withdrawals | Yes |
| Is the account FDIC-insured? | Yes | No, but low risk |
| What is the interest rate? | Significantly higher than traditional savings accounts | May be higher than high-yield savings accounts |
| Are there fees? | None | Whatever the fund’s expense ratio is |
Bottom line
High-yield savings accounts and money market funds are good ways to earn a decent return on your cash and short-term savings. The key difference between the two is that high-yield savings accounts are FDIC-insured, while money market funds are not. However, money market funds are considered very low-risk investments and may even have higher interest rates than high-yield savings accounts.
Check out Bankrate’s list of the best money market funds before deciding which to choose.
FAQs
The key difference between the two is that high-yield savings accounts are FDIC-insured, while money market funds are not. However, money market funds are considered very low-risk investments and may even have higher interest rates than high-yield savings accounts.
Is a money market account better than high-yield savings? ›
So, when should you choose a money market account over a high-yield savings account? Typically, money market accounts are better suited to people with larger amounts of money they're looking to save, as they'll be able to meet any minimum balance requirements and therefore avoid fees.
Which pays a higher return savings account or money market account? ›
Money Market Accounts (MMAs)
An account's interest rates can depend on your account's amount. To earn a higher rate, money market accounts could require a higher minimum deposit or daily balance than a regular savings account. On average, MMAs provide higher returns than savings accounts.
Which pays a higher return a savings account or money market? ›
Most money market accounts tend to pay a slightly higher interest rate than a traditional savings account, which can make them more attractive for depositors.
What is the downside of a high-yield savings account? ›
The cons of high-yield savings accounts
Interest rates on high-yield savings accounts are variable and can fluctuate at any time, so while a bank may advertise a high annual percentage yield (APY) when you apply, it likely won't last forever.
What is the downside of a money market account? ›
Many accounts have monthly fees
Another drawback to remember is that while they have high yields, money market accounts can also come with cumbersome fees. Many banks and credit unions will impose monthly fees just for the upkeep of your account.
Should I do a money market account or savings account? ›
Many savings accounts have no or low minimum balances and low or no fees. Many money market accounts have much higher minimum balance requirements and monthly fees. This makes them more popular with people who have larger balances and who want the flexibility to make large purchases.
Which is safer money market or savings account? ›
Money market accounts and savings accounts are equally safe places for consumers to keep their savings. However, it's important to open accounts at banks that are covered by FDIC insurance. You can check if your bank is FDIC-insured here.
What is an advantage of a money market over a savings account? ›
Key takeaways. Advantages of money market accounts often include high yields, liquidity and federal insurance for your funds. They may come with the ability to pay bills, write checks and make debit card purchases.
Do you pay taxes on a high-yield savings account? ›
The IRS treats interest earned on a savings account as earned income, meaning it can be taxed. So, if you received $125 in interest on a high-yield savings account in 2023, you're required to pay taxes on that interest when you file your federal tax return for the 2023 tax year.
Both CDs and MMAs are federally insured savings accounts, so they're equally safe.
What is a better investment than the money market? ›
Bond funds invest in various fixed-income securities and offer a higher potential return than money market funds but also come with greater risk. Short-term bond funds typically invest in bonds with maturities of five years or less.
Do millionaires use high-yield savings accounts? ›
Millionaires Like High-Yield Savings, but Not as Much as Other Accounts. Usually offering significantly more interest than a traditional savings account, high-yield savings accounts have blown up in popularity among everyone, including millionaires.
Which bank gives 7% interest on savings accounts? ›
As of May 2024, no banks are offering 7% interest rates on savings accounts. Two credit unions have high-interest checking accounts: Landmark Credit Union Premium Checking with 7.50% APY and OnPath Credit Union High Yield Checking with 7.00% APY.
What happens if you put 50000 in a high-yield savings account? ›
How much of a difference does this make? If you deposit $50,000 into a traditional savings account with a 0.46%, you'll earn just $230 in total interest after one year. But if you deposit that amount into a high-yield savings account with a 5.32% APY,* your one-year interest soars to over $2,660.
What is the advantage of a money market account over a savings account? ›
Advantages of money market accounts often include high yields, liquidity and federal insurance for your funds. They may come with the ability to pay bills, write checks and make debit card purchases.
Should I move all my money to a high-yield savings account? ›
Although each financial situation is unique, it doesn't typically make sense for you to keep all of your money in a high-yield savings account.
Do you pay taxes on money market accounts? ›
Income earned from money market fund interest is taxed as regular income, up to 37% depending on the investor's tax bracket. While some local and state taxes offer breaks on income earned from U.S. Treasury bonds, federal income tax still applies.
