13 Oct Savings accounts vs. money markets

Q. How is a savings account different from a money market account?
— Learning

A. There are similarities and differences between savings account and money market accounts, but don’t forget to note there are also money market funds — and those are also a bit different.

“All three are good tools for someone that is saving for emergencies, large purchases they will be making in the short-term, or to hold money they are not yet ready to invest,” said Sheri Iannetto Cupo, a certified financial planner with SageBroadview Financial Planning in Morristown.

She said savings accounts typically have lower required minimum balances, and there are federal regulations that limit you to six withdrawals or outgoing transfers each month, though ATM withdrawals are not restricted.

Right now for savings accounts, the interest rate averages 0.06 percent for banks with physical locations, while online banks pay around 1 percent.

“[Savings accounts) normally charge a `maintenance fee’ if certain requirements are not met, such as minimum monthly balance or transferring a minimum monthly amount from your checking account with the same bank into the savings account,” Cupo said.

Savings accounts don’t usually don’t allow you to write checks and are FDIC-insured up to $250,000.

Money markets savings accounts, or money market accounts, are very similar to a savings account aside from the things that they are allowed to invest in, Cupo said.

“Unlike personal savings accounts, banks can invest these accounts in short-term, fixed-income investments such as CDs and bonds,” she said.

The average interest rate is about 0.26 percent for brick-and-mortar banks, while online banks are around 1 percent.

“There are rules in place that limit the max withdrawals from a MMA to six. Banks can choose to allow less if they wish,” Cupo said. “If the person goes over six withdrawals, then the bank is required to move the money to a non-interest bearing account.”

Cupo said these accounts are $250,000 FDIC-insured, offer some check writing abilities, usually and usually have a large minimum balance.

The account is treated like cash, while money market funds are treated as a “share of a fund,” she said.

Money market funds are not FDIC-insured.

“Even though the funds are typically invested in low risk short-term securities, there is a risk of `breaking the buck’ where the net asset value (NAV) goes below $1,” Cupo said.

You will be permitted to write checks and make withdrawals, but you are restricted in the way you do them. For example, you could be restricted to writing checks of a minimum of $250, Cupo said.

And, money market funds are considered an investment rather than a savings account.

Hope that helps you pick the correct account for you!

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This post was first published in October 2016.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.