When you save money, you want your savings to grow as quickly as possible. That means choosing a savings account that pays generous dividends or interest. But which type of savings account should you choose?
At Addition Financial, we want to empower our community to make smart financial decisions. To do that we provide information that can help you make informed decisions about where to keep your money. We’re often asked about the debate between money market vs. high-yield savings accounts. While these two types of accounts have a lot of similarities, they differ in some important ways. Here’s what you need to know.
What is a money market account?
A money market account is a type of savings account that has a higher interest rate or higher dividends than a traditional savings account. (We should note here that, as a credit union, Addition Financial pays dividends to our members with money market accounts because they are part owners of our credit union.)
The trade-off for having a higher annual percentage yield (APY) on a money market savings account is that there are some restrictions that may apply. Here are some of the most common:
- Minimum deposit requirements. Many financial institutions require a minimum deposit to open a money market account.
- Minimum balance requirements. It’s common for credit unions and banks to require a minimum balance to pay dividends or interest.
- Limited monthly transactions. There may be limitations on how often you can withdraw or transfer funds from your money market account.
For example, our Addition Financial insured money market account does not have a minimum deposit requirement, but we do have a minimum balance requirement of $1,000 to earn dividends. We also limit transactions to six per month, although there are unlimited transactions for mobile or online banking.
A money market account may come with some features that aren’t typically associated with savings accounts, such as a debit card or checks.
What is a high-yield savings account?
A high-yield savings account is a type of savings account that pays a higher interest rate or dividends on balances. It has a lot in common with a money market account, but money market accounts have some special features that high-yield savings accounts don’t.
The dividend or interest rate for a high-yield account may be up to 10 times higher than for a standard savings account. These accounts usually do not have a minimum balance requirement to earn dividends or interest, which may make them a more attractive option for some savers.
Not every credit union or bank offers a high-yield option, but many do. If you want easy access to your money while it earns a generous APY, a high-yield savings account might be the right choice for you.
What are the differences between a money market and high-yield savings account?
Understanding money market accounts and high-yield savings accounts is the first step. Now, let’s review some of the most important differences between them.
Account requirements
The biggest difference between how a money market account works and how a high-yield savings account works is in the requirements to open an account. It’s common for money market accounts to impose both a minimum deposit requirement and a minimum balance requirement to earn interest or dividends.
For example, our Addition Financial money market account doesn’t have a minimum deposit requirement, but we do have a minimum balance requirement of $1,000 to earn dividends. Before you open a money market account, make sure you understand the requirements and are confident you can maintain the minimum balance to maximize your earnings.
Account limitations
The second difference between money market and high-yield savings accounts is related to how often you can use and access your savings. It’s common for money market accounts to come with some limits on the number of transactions per month.
Our money market account has a limit of six transactions per month by debit card, check, ACH transfer, overdraft protection or by phone with one of our team members. However, members may make unlimited transfers or withdrawals via online banking, mobile banking, ATM or via our automated telephone service.
Account features
The last major difference between a money market and high-yield savings account is in the features of the account. A lot of money market accounts come with checks and a debit card, both of which make it easy to access your money. If you’re saving but still want your funds to be liquid, these features may be appealing to you.
High-yield savings accounts behave like traditional savings accounts. They typically do not come with checks or a debit card, so you’ll need to transfer funds to your checking account if you want to use them to cover a check or withdraw cash at an ATM.
What are the advantages and disadvantages of money market accounts?
One of the most important things you can do before choosing between a money market account and a high-yield savings account is to review the pros and cons of each. Here are the advantages and disadvantages of a money market account.
Pros of a money market account
- Higher than average dividends or interest, which allow your money to grow.
- Easy access to funds when you need them.
- Flexibility to use your funds in a variety of ways, which may include checks and ATM withdrawals.
- Protection from either National Credit Union (NCUA) or Federal Deposit Insurance Commission (FDIC) insurance up to $250,000.
Cons of a money market account
- Minimum deposit requirements may apply.
- There may be balance requirements in order to earn dividends or interest.
- There may be a monthly limit on transactions.
For many people, the two biggest advantages of a money market account are the high APY and the flexibility of how money can be accessed, while the biggest disadvantage is the minimum balance requirement.
What are the advantages and disadvantages of high-yield savings accounts?
Now, let’s look at the pros and cons of a high-yield savings account.
Pros of a high-yield savings account
- Higher rate of interest or dividends that may be many times higher than a traditional savings account.
- Easy access to money, similar to a traditional savings account.
- NCUA or FDIC insurance coverage.
Cons of a high-yield savings account
- Interest rates are variable, so earnings may fluctuate.
- No ATM card or checking option.
- Some financial institutions place monthly limits on withdrawals or transfers.
- There may be balance requirements to get the highest interest rates.
The biggest advantage of a high-yield savings account is the typically-high APY, while the biggest downside is that you won’t have the option of writing checks or making withdrawals at an ATM.
Tips to help you choose between a money market and high-yield savings account
Now that you understand money market accounts, high-yield savings accounts and the differences between them, here are some pointers to help you choose the right account for your needs.
Determine how much you have for an initial deposit
The first step is to determine how much money you have for an initial deposit. If you don’t have much, then you may not be able to qualify for a money market account or get the highest possible dividends/interest on a high-yield savings account.
Compare rates
If you’re like most people, your primary concern when opening a savings account is how much interest you’ll earn on your balance. You’ll want to look at the rates being offered and what the requirements are to earn them. You should also confirm if the rate is variable.
Compare fees
Sometimes a credit union or bank account comes with a built-in monthly fee. You should confirm all fees and read the fine print to make sure there aren’t any hidden fees. As a reminder, credit unions usually have lower fees than banks.
Research credit unions and banks
We always recommend doing a bit of research to learn about the financial institutions you’re considering. You should check to make sure that any credit union or bank is protected by either NCUA or FDIC insurance. Be particularly important with online financial institutions.
Think about how you want to access your money
As we have noted, one of the biggest differences between money market and high-yield savings accounts is accessibility of funds. If you want to be able to write checks against your balance or withdraw cash at an ATM, you’ll be better off with a money market account than you will with a high-yield savings account.
Choose a financial institution
One of the most important decisions you’ll make when opening a savings account is which type of financial institution you want. Most credit unions and banks offer money market accounts, while high-yield savings accounts are rarer. Remember that credit unions typically offer lower fees and higher dividend rates than banks.
Grow your savings with Addition Financial
Choosing which type of savings account you want requires both understanding the options and the differences between them and taking your personal preferences and needs into consideration. The information we’ve included here will help you decide between a money market vs. high-yield savings account.
Are you looking for a money market account with generous dividends and maximum flexibility? Addition Financial is here to help! Click here to read about our insured money market account and become a member today.
Posted on Oct 6, 2023
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