Money Market Accounts Vs Savings Accounts

Considering the current economic instability and the lack of faith of the common man in the financial system, it is obvious that today the financial sentiment is tilting more towards the safety of funds than to the higher yields or returns. The common man is looking less and less at the return on investment figures and looking more and more at parameters like minimum balance requirement, safety of funds and liquidity, today than ever before. Yet, not all are same and not everyone has the same requirements and hence the reason for this article. Here's the low down on both the bank accounts, just to help you choose the best one for yourself, considering your unique needs and preferences.

Definitions

Money Market Accounts
These bank accounts are not really that much different from normal bank savings accounts. They are bank accounts that give relatively higher rates of interest (in real terms) and require larger minimum balances to support this 'high interest rate' facility. They are alternately known as money market demand accounts or money market deposit accounts (MMDA).

Savings Accounts
This is an account with a bank or financial institution that primarily looks out for principal security and hence provides very modest interest rates. These accounts are considered as the most liquid instruments, right after demand accounts and actual cash. Their only drawback is that savings accounts usually pay lesser interest rates than Treasury bills and certificate of deposits.

Comparison Between the Two Accounts

Special Characteristics
Both the accounts differ in their special characteristics in the following aspects.

• While a money market account is a longer term, less liquid investment option, savings accounts are generally shorter term and more liquid. This is so because the meager interest rates given on these accounts make them imprudent long term investments and the higher interest rates on money market accounts lure the investors in sticking with the investment for longer durations.
• Most of these accounts require very high minimum balances and this is done to enable the institution to invest in investments that can help it keep up with the promised yield. Savings accounts on the other hand are fairly easy to start and they require lesser minimum balance amounts. The minimum balance criteria offers savings account greater withdrawal facility (and hence the higher liquidity) than the money market accounts (one has to maintain the balance and cannot withdraw a lot if one is to earn the higher interest income)
• Money market accounts or MMAs usually have a limit on withdrawals and this limit is far stricter than savings account withdrawals limits. Depending on the type of savings account, there are impositions of fees made on checks and withdrawals, and there is even a limit on the number of transfers or transactions that take place per month. Despite this, these accounts are still more liquid than MMAs.
• Savings accounts give the investors the advantages of no or low minimum amounts to open the account, easy access to money invested, online banking flexibility, safety of balances invested etc. MMAs offer higher interest rates to help your investment grow, higher minimum balances (to ensure that you actually save and do not withdraw and spend as per wish) and safety of investment. As both accounts are insured by the FDIC (Federal Deposit Insurance Corporation), both accounts give safety of investment, up to $250, 000.
• Last but not the least, as money market accounts are not meant as high transaction accounts, they give the indirect advantage of larger amounts actually being saved by the investor. The savings is topped with the advantage of higher interest rates and thus growth of funds. Savings accounts however, are necessary as accounts to safe money for routine expenses, where money stays safe and is always available to you, even though it may not grow at impressive rates.

Now that you know all the details of the comparison, you should be able to choose wisely according to your preferences. Yet, there is one more account that you should know of when making such a decision. Have a look at it and its advantages and disadvantages as well, to make an even better, informed decision concerning your personal finances.

Money Market Mutual Fund
Money market mutual funds are open-ended funds that invest only in money markets and hence are quite liquid themselves. Also known as money funds or money market funds, their main goal is the preservation of principal providing liquidity. They do earn modest dividends on the investment but it is hardly noteworthy. Though they are not FDIC insured like the money market accounts and the traditional savings accounts, they risk they carry is quite low and doesn't require cover on most occasions. The biggest risk that a money market mutual fund faces is that its return may not cover the inflation erosion over time. The three biggest advantages of money market mutual funds are liquidity and safety, easy trade between money market funds of the same institution and lastly, and extra percentage or two of extra returns over other investments (due to their use as cash management tools by brokerage firms).

This was all about money market accounts vs savings accounts. Once again I stress, it is your money so decide what you want to do with it only after researching all the three fairly liquid methods of investment mentioned above. The decision depends solely on your priorities, i.e. whether you wish for liquidity, higher return or principal safety. Invest wisely, for yourself, as well as the economy.