When you were little, saving money looked like putting every dime of your allowance in a piggy bank. The plug in the bottom was hard to open, and the slit at the top was too small for your chubby little fingers to fit through. So when the ice cream truck came around, it seemed impossible to get your money out—and for good reason. Whether you realized it or not, that hard-to-open piggy bank was teaching you how to save your money.
And now that you’re older and saving for things that are much more expensive than an ice cream sandwich, you really can’t afford to pull the plug on the piggy bank. But you also need a better place to park your money. You’ve probably heard that your best two options for saving are money market accounts and savings accounts.
But which is better? Don’t worry—we’ve got the scoop on when it’s right for you to use a money market versus savings account.
What Is a Savings Account?
A savings account is a free account you can open with your local bank. It gives you a safe place to put your hard-earned money that you won’t (or shouldn’t) be touching for a while. You might be asked to keep a minimum balance in your savings account at all times, but your bank could throw in a free checking account.
Calculate the growth of your money market account with this free tool.
Think of it this way: Checking accounts and savings accounts are inseparable best buds. They do everything together. But on top of having your checking account’s back in case of an overdraft, the savings account can actually earn you money. If we’re honest, it’s nothing to write home about. We’re talking pennies on the dollar . . . but that’s okay! With this savings account, you’re not worried about your rate of return. Think of it as a safer version of your beloved childhood piggy bank.
What Can I Expect From a Savings Account?
From an everyday, run-of-the-mill savings account, you can expect:
- A limited number of transfers or withdrawals per month (no more than six)1
- A (very) small rate of interest
- A safe place to keep money you won’t be using for a little while—ahem, like your starter emergency fund
Also, be aware of any fees that come with a new savings account. A lot of the time, you’ll have to meet a minimum balance to escape them.
What Is a Money Market Account?
A money market account is a type of savings account that gives you a chance to earn a higher rate of interest on your account balance, keep your money safe and sound, and have more access to your account than a typical savings account (think checks and debit cards). You’ll probably also need to make a higher initial deposit or keep a higher monthly balance in your money market account.
The money market account and the savings account are kind of like siblings. They’ve got similar DNA, but they still look (and act) a little differently. That being said, there are a few places where you could open your money market account:
- Your local bank
- An online bank
- A mutual fund company
Like we said earlier, money market accounts give you the opportunity to earn a higher rate of interest on your account balance. But listen closely: Your main goal in using a money market account isn’t to make money. That comes later.
Keep in mind that if you’re still paying off all of your debt, you might not want to open a money market account with a mutual fund company. There’s a higher risk of losing your hard-earned money in the short term and less freedom to cover those unexpected emergencies.
Money Market vs. Savings: What’s the Difference?
Here’s the deal: Both money market accounts and savings accounts are great for stockpiling cash. The biggest difference you’ll find between money market accounts and savings accounts is the amount of access you have to your money. A savings account limits you to six or so transactions per month, while a money market account gives you the freedom—and flexibility—of writing checks. It sometimes even comes with a debit card.
Let’s compare money market and savings accounts a little more closely:
Both money market accounts and savings accounts at banks protect you in case your bank goes under. The FDIC, or Federal Deposit Insurance Corporation, will cover your deposits in both of these accounts all the way up to $250,000. But not all money market accounts have this luxury.
Quick note: Money market accounts are very different from money market fund accounts (sometimes called money market mutual funds). Money market funds live in the investment world—which means if you park your savings there, you’re taking the risk of losing your money. But if you’re not ready to start investing and you’re just looking for a good place to save some cash, you’ll want to stick a regular money market account at a trusted bank.
Both a money market and savings account also give you the opportunity to earn interest—a really small amount of interest—depending on your bank’s current rates. But don’t forget: This is a savings account. You’re not really trying to make money on this money. You’re trying to save for specific purposes like emergencies, a down payment on a house, a family vacation, or even next year’s Christmas fund.
Which Account Should I Choose?
Here’s the thing: It really depends on where you’re at in your wealth-building journey—or as we call them, the 7 Baby Steps.
Baby Step 1 is saving up $1,000 strictly for emergencies. That starter emergency fund would work best in a regular ole savings account—especially because some money market accounts require a minimum deposit higher than $1,000.
By putting your starter emergency fund in a savings account, you’ll still be able to access it, but it’ll be a little harder than swiping a card or writing a check to get to it. Of course, you’ll still have the ability to make online transfers between your checking and savings accounts. (Remember: Your checking and savings accounts are best buds.) This is where discipline comes in—don’t touch it!
You’ll leave that $1,000 in there as you work on tackling all of your debt (Baby Step 2). Once you’re debt free (woo!), you’ll start working on saving three to six months of expenses in a fully funded emergency fund (Baby Step 3). As you see those dollar signs add up, you’ll want to put that cash in a money market account. Not only will it be safe and secure, but you’ll also have better access to it in case life throws a surprise your way.
No matter where you’re at, saving for life’s big events is always a good idea. Learn how to walk the Baby Steps one step at a time in Financial Peace University—available only in Ramsey+. FPU has helped millions of people learn how to give, save and spend like no one else. And your Ramsey+ membership also comes with access to the premium version of the EveryDollar budgeting app to track your spending and savings.