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Savings accounts and money market accounts are two basic ways to stash some cash while keeping it accessible — just in case you need it. They’re considered “liquid” accounts, meaning you can take your money out at any time.
Both types of accounts are insured up to $250,000 by the Federal Deposit Insurance Corporation (or FDIC) at banks, or the National Credit Union Administration (or NCUA) at credit unions. They also pay interest. But there are some key differences between savings and money market accounts.
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Shared features of savings and money market accounts:
- They’re liquid.
- They pay interest.
- They’re federally insured.
- Electronic transfers are limited.
- Withdrawals at ATMs, in person or by mail are unlimited.
- A minimum balance may be required to avoid fees.
- They offer the potential to earn high yield.
Passbook vs. statement vs. money market
Savings accounts come in two flavors: passbook and statement.
A passbook account comes with a small booklet, or passbook. You generally make deposits or withdrawals in person at a bank branch, and the teller records the transaction in your passbook and includes your current balance.
With a statement savings account, you have a wider array of options for making transactions, such as by using ATMs, and you receive regular mailed or electronic statements detailing your deposits, withdrawals and interest.
Decades ago, passbook savings were the standard type of savings account, but not anymore. With the rise of automated and online banking, statement savings have taken over.
Money market accounts typically pay slightly better interest than you get from either type of savings account, plus they allow you to write checks, a feature that savings accounts don’t have. However, some high-yield savings accounts let you link to your checking account to make deposits and withdrawals easier.
Withdrawal limits and minimum balances
Whether you have a savings or a money market account, federal regulations limit you to six electronic, telephone or preauthorized transfers per month, and no more than three of those can be by check, draft or debit card. You can make unlimited withdrawals by teller, ATM or by mail.
The minimum balance required to open a savings account is usually quite low, sometimes just $1 or $5, but you’ll probably need much more than that in the account to avoid fees. A fair number of institutions require a minimum balance of $100, $500, even $1,000 if you want to avoid triggering a monthly maintenance fee. And because the interest rates on these accounts are usually very low, it doesn’t take many fees to eat up your interest payments and erode your principal.
The minimum balance to avoid fees on money market accounts can be even higher, with some banks demanding as much as $10,000 to avoid a $25 per month fee.
Hunt for a high-yield account
Shopping for a high-yield account is where you can make a big difference in your returns.
High-yield savings and money market accounts used to be found most often at online-only banks. The idea was that they had less overhead and could pay better rates. But that changed as the traditional banks saw customers pour money into the accounts to enjoy the higher rates. Now, you find many traditional banks offering high-yield savings and money market accounts. But you may have to open and manage the account online.
A savings or money market account can be a great place to build and keep an emergency fund, especially if you’ve found a high-yield account. Each of us needs to have enough cash on hand to last through up to six months of unemployment or other emergency, such as getting your only car running again so you won’t lose your job.
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