Savings account rates have been on the rise this year thanks to the Federal Reserve’s ongoing series of interest rate hikes. As a result, now is an especially good time to reevaluate where you’re putting your money.
We Are/Getty ImagesForget storing your cash in a sock drawer or under the bed. Not only does that put your money at risk of theft, but it’s not going to grow there, either.
With a savings or money market account, on the other hand, it could.
Savings account rates have been on the rise this year thanks to the Federal Reserve’s ongoing series of interest rate hikes. As a result, now is an especially good time to reevaluate where you’re putting your money.
Money market accounts and savings accounts (particularly high-yield accounts at online banks) are two popular options you might want to consider. Here’s what these accounts have to offer and how to know which one’s right for you.
What is a savings account?
A savings account is a type of bank account designed for stowing away funds for future use. It has an interest rate attached, which indicates how much your account balance will grow in a year. This is also known as the annual percentage yield, or APY.
Interest rates vary based on the financial institution, but you’ll typically find the best savings account rates at online banks. Many offer high-yield savings accounts with interest rates as high as 4% — the highest they’ve been in years. By contrast, the average interest rates for traditional savings accounts have hovered around 0.23% — just a fraction of what you’d get from a high-yield option.
“Online savings accounts are a wise choice for people who want to get the most out of their money while starting with the least amount possible,” says Lyle Solomon, a debt attorney at Oak View Law Group and author of the savings book, Think Different Save More.
Pros and cons of savings accounts
There are many benefits to savings accounts. First, they often have no minimum balance requirements, which means you can start one easily and with little cash in hand.
They also help you grow your savings over time and are insured by the Federal Deposit Insurance Corporation, which will reimburse you up to $250,000 in the event your bank closes.
On the downside, some savings accounts limit how many withdrawals you can make each month, as well as how much you can take out. They also may charge maintenance fees. Most importantly, unless you opt for a high-yield savings account, they tend to have lower interest rates than money market accounts (more on this later).
Pros:
- Easy to start
- Allow you to earn interest
- FDIC-insured
Cons:
- May have withdrawal limits
- May come with fees
- In some cases, lower interest rates than money market accounts
What is a money market account?
Money market accounts combine the features of a traditional savings account and a checking account. As Solomon explains, “Money market accounts provide flexible access through debit cards and the ability to write checks, as well as the interest-earning potential of a high-yield savings account.”
You can find money market accounts at the same institutions where savings accounts are offered — brick-and-mortar banks, online banks, and credit unions. The reason you might consider one? They tend to offer higher interest rates than savings accounts. While the average money market rate is less than a quarter of a percent, by shopping around you might find one that yields more than 3.5% in annual interest, according to Bankrate.
Keep in mind: A money market account is not the same as a money market fund. Though they sound similar, money market funds are actually investments, which are riskier but often come with more long-term growth.
“A money market fund is a hybrid instrument invented by mutual fund companies in the late 1970s,” says Dan Hawley, president of Hawley Advisors in Walnut Creek, Calif. “They’re going to be the better place for investors.”
Pros and cons of money market accounts
The big upside is that money market account rates tend to be higher than those on traditional savings accounts.
Money market accounts also typically come with debit cards and checkbooks, which you can use to access your funds when needed. And finally, these accounts come with FDIC insurance, so your money’s protected up to $250,000. (This is different from money market funds, which are not FDIC-insured).
The drawback of money market accounts is that many have minimum balance requirements, usually between $1,000 and $10,000, which limits who can open one and enjoy their benefits. Some may also have limits on withdrawals — both the frequency and amount.
Pros:
- Higher interest rates, in some cases
- May come with a debit card/checkbook
- FDIC-insured
Cons:
- May have minimum balance requirements
- May have withdrawal limits
- May have fees
How to choose between a money market account and a savings account
Both money market and savings accounts can help you stow (and grow) your wealth, but they’re not exactly the same. To choose the best one for your needs, consider your spending habits. While money market accounts sometimes offer higher returns, they also afford you easier access to your money, which might make it tempting to use along the way.
“A savings account is the best option for those who are just getting started with their savings,” Solomon says. “Thanks to access restrictions, you can build a healthy savings habit and resist the temptation to dip into your savings account too often. However, as money market accounts have a high yield and come with a higher interest rate, they’re a better investment option.”
Whichever you choose, make sure to shop around. The best money market accounts and savings accounts — at least rate-wise — are typically found at online banks, but minimum balance requirements, fees, and other factors can vary widely.
The most important part? Find a way to take advantage of the highest savings account interest rates seen in years.
Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.
This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at lauren.williamson@hearst.com.
