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Money Market Account vs. Basic Savings Accounts: Pros & Cons

access_time Posted on: June 20th, 2019

Banks and credit unions offer a variety of options when you want to store your money. The key to making the best decision is taking your current financial needs and goals into consideration.

Money Market Account vs. Savings Account

Two popular options are the money market account and basic savings account.

This post will outline the difference between the two, the pros, and cons of each option, and how to choose the best one that suits your financial needs.

What Is A Money Market Account?

A money market account is also known as a money market deposit account (MMDA). It is an interest bearing account which provides a higher interest rate than a traditional savings account.

Pros Of Money Market Accounts

Unlike a savings account, money market accounts often offers check writing and debit card privileges. Learn more about the benefits of a money market account below.

Higher Interest Rates

Money market accounts offer higher variable interest rates compared to a traditional savings account.

According to the Federal Deposit Insurance Corporation (FDIC), the current average savings account interest rate is 0.10%, and the average money market interest rate is almost double at 0.19%.  They can offer higher interest rates because they invest in certificates of deposit, government securities, and commercial paper, while savings accounts don’t.

Checkwriting and Debit Card Privileges

Most money market accounts offer check writing privileges and a debit card similar to what you receive when you open a checking account. This enables you access to your money with ease, but there can be limitations, some of which are outlined below.

Cons Of A Money Market Account

Although money market accounts come with many great advantages, there are a few cons to these types of savings accounts.

Limited Transactions

You have access to your funds via checks and a debit card, but there are limitations to the number of transactions you can make each month. Most accounts have a limit of 6 transfers and electronic payments. However, you can make unlimited deposits and unlimited transfers in person, by mail, messenger, or ATM.

If you exceed these limits, you can be fined, penalized or have your account converted to a checking account. These limits are set to encourage you to leave your funds in place and not rely on them for everyday transactions.  This is why these accounts offer a higher interest rate – so your money can grow, which takes time and a steady or increased balance each month.

What Is A Basic Savings Account?

Most of us are familiar with a basic savings account. You’ve probably had one at some point in your life. It is an account that bears modest interest rates averaging 0.10%. This is where people typically store money they don’t need in their checking account but they want to easily access.

Pros Of Basic Savings Accounts

If you’re looking for accessibility in an interest-bearing account, a basic savings account might be your best bet.

Higher interest rate

Basic savings accounts offer a higher interest rate than a checking account. That’s why, if you have money that you don’t need for day to day spending, you should transfer it to a savings account or other high-interest account.

While the rate might not be as high as other options, it provides a better return on your investment compared to sitting in a checking account if you plan to access the funds on a regular basis.

Easily Accessible

This account is excellent if you are saving for a specific purchase or to build an emergency savings account.

When you need your money, it is easily accessible, allowing you to get your funds quickly. It is considered a liquid asset because it can easily be converted to cash. It’s not wrapped up in a stock, mutual fund, 401K, CD or another type of account which requires more effort, and penalties or fees, to get your money.

Cons Of A Basic Savings Account

When it comes to account accessibility and interest-bearing accounts, you should carefully compare money market accounts vs. savings accounts to choose the best option for you. Just like there are many advantages of basic savings accounts, there are also disadvantages.

Easily Accessible

Accessibility to funds is a pro, it can also be a con. Think about how many people would have drained their 401K if there weren’t so many harsh penalties. If they could quickly hit a button and have access to tens of thousands of dollars, many would have nothing left.

It’s the same concept with a savings account. There is no barrier to your money and no penalty for withdrawing your funds, therefore, you will likely be more tempted to use it in situations where it’s not required. That can hinder you from reaching your savings goals.

Lower interest rate

Although savings account rates are higher than a traditional checking account, they are much lower than you can get with a money market account or certificate of deposit.

Money Market Account Vs. Savings Account, Knowing Which Is Best For You

You will likely find yourself in a position at some point when having a money market account and a savings account are beneficial to you. Here’s how to determine which account is best for you based on your current needs.

Due to the higher interest rate of a money market account, they are best for long term saving and when you have more substantial sums of money. If you have funds that don’t need to be touched often and can benefit from sitting in one account, a money market account might be best.

Savings accounts are better for shorter-term savings goals, or small emergency savings account so your money is easily accessible in case you need it.

Learn about savings accounts and money market accounts from Belco, your community credit union.

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