eli5 Savings vs Money Market


What’s the difference between Savings and Money Market accounts? Some say they have different amounts you can withdraw money but that doesn’t seem like enough of a difference to justify having a separate name for them. I’ve heard there’s very slightly more risk in a money market account but idk if that’s true. The interest rates seem to be the same or similar in most places. What’s the deal?

In: 5

There are a few differences:

– MMA’s (money market accounts) have debit cards or check privileges, letting you pay directly from your account without having to first transfer to a different account.

-MMA’s tend to yield higher interest than regular savings

-MMA’s have more restrictions, like minimum balance

Because of the variable interest rates, fees, and minimum balance, MMA’s are usually seen as a short term savings account. When saving for things like retirement, traditional savings accounts tend to be more appropriate.

Honestly, it depends on the bank. I’ve worked for banks that had a “money market savings” account and a “money market checking” account. I think it is used to indicate a higher interest rate, because the important thing is whether an account is considered a checking account or savings accounts.

See, there are two very broad types of accounts, transaction accounts and time deposits. Time deposits are also called CDs. You deposit a set amount of money for a set amount of time at a set interest rate.

Transaction accounts can be further divided into checking and savings accounts.

Checking accounts are supposed to be primarily for conducting large amounts of transactions without a real limit. You can write checks, use a debit card, transfer money online, and use a cash machine pretty much as much as you like.

Savings accounts are supposed to be used for, well, saving your money. Before COVID, a regulation (Reg D) limited the number of transactions allowed on a savings account at *six* per month. Certain transaction types were excluded (phone and teller withdrawals) but if a customer exceeded six transactions per month, too many times, the bank would take steps to close the account and re-establish it as a checking account.

The reason for this is that the government (the Federal Reserve, specifically) takes different measures of the money supply, known as M1, M2, and M3. The higher the number, the less liquid the money. Checking accounts are in M1, savings accounts are in M2, certain time deposits are in M3. The Reg D transaction limit on savings accounts helps ensure M2 is less liquid than M1.

All that said…when COVID hit, the Reg D limit on transactions was lifted and has not yet been reinstated: