While investing is the best way to make your money grow over time, saving helps you plant the first seeds for financial success.
How much should you save? Ultimately, you want to set aside enough savings to cover your basic expenses for at least three to six months. The theory behind that rule of thumb is that if you unexpectedly find yourself out of work, your emergency fund should be able to keep you afloat financially while you figure out your next move.
Of course, not all financial emergencies are that dire, and working towards that ideal, big sum shouldn’t hold you back from investing. A good place to start is with a savings target of $1,000—enough to cover most run-of-the-mill emergencies, like a bit of car trouble or an emergency trip to the dentist. Then, you can continue to save while you also get started investing and working toward other financial goals.
But where should you stash that emergency cash? Unlike your investing dollars, which you shouldn’t need to touch for at least the next few years, your savings needs to be easily accessible. Under your mattress or in a literal piggy bank satisfies that criteria, but you have better options. Going with a savings account or money market account lets you dip into your funds at a moment’s notice while also keeping your money safe and earning interest. Neither type of account will earn you as much as you stand to make by investing, but rates have been slowly rising in recent years.
So, what is a savings account?
It’s a bank account that keeps your money safe while it also earns a little interest. The safety feature stems from being insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000, which means you cannot lose that money, even if the bank goes under. (That is, as long as the bank is FDIC-insured, so make sure that’s the case when you select your savings account.)
Interest rates are determined by the bank or credit union, so it can vary greatly between accounts. The national average is a mere 0.28 percent, according to DepositAccounts—or 28 cents for every $100 you deposit. But among the top 1 percent of accounts, the average jumps up to 2.05 percent or more. Note, though, that some accounts offering top rates may come with fees or certain restrictions, like minimum balance requirements. For example, FitnessBank offers a maximum rate of 2.75 percent on its savings account, but requires a minimum average daily balance of $100. If you fall below that minimum requirement, you get charged $10 a month. Also, falling in line with FitnessBank’s quirky mission to combine financial and physical wellness goals (hence the bank’s name), you have to rack up an average 12,500 daily steps or more on the bank’s Step Tracker app to qualify for that top rate. (Seriously.)
And what is a money market account?
Not to be confused with money market funds (which are a specific kind of mutual fund), money market accounts (MMAs) are very similar to savings accounts—with the security of being FDIC-insured for up to $250,000 and the ability to earn interest. (Money market funds are not FDIC-insured and can lose money just like any other investment.)
Typically, MMAs offer slightly higher rates than savings accounts, with the national average being 0.40 percent, according to DepositAccounts, compared with the average 0.28 percent for savings accounts. In exchange for the higher rates, they also tend to come with higher minimum balance requirements, in some cases up to $10,000 or $25,000. Although it is worth noting that the best-paying savings accounts actually beat out the MMAs (as of fall 2019). The average rate for the top 1 percent of MMAs is 1.98 percent, slightly less than the average 2.05 percent for the top 1 percent of savings accounts.
A bigger difference between the two types of accounts: accessibility. MMAs are more likely than savings accounts to offer check-writing capabilities and ATM or debit cards. That can be an attractive feature, especially when you need to quickly tap your account in an emergency.
It’s important to note, though, that both MMAs and savings accounts are legally required to limit you to six withdrawals a month. (Although some banks, like Ally Bank, allow unlimited withdrawals from an ATM.) If you go over that limit, you face penalty charges, and if you do it frequently enough, the bank can close your account. And fees and punishments aside, remember that these accounts are meant for saving, not spending, so you really shouldn’t need to dip into these funds very frequently at all. If you think the temptation to spend rather than save this money might be too much for you, the benefit of easy access to your money can quickly become a liability.
Which account is better for me?
Your call. The account types are so similar, either would make a fine choice as a place to store your savings. And there’s no need to limit yourself to just one or the other. But the details—including interest rates, minimum balance requirements, fees and accessibility—can vary so greatly between specific accounts that it’s important to shop around and make sure you’re getting the best possible deal for you. You can quickly compare accounts using sites like DepositAccounts, Bankrate and MagnifyMoney. Just be sure to dive into the fine print for each account you’re considering before you hand over your hard-earned cash.
In general, though, as long as you’re building up your savings and taking the time to find an account that will keep your money safe and growing, you’re already doing all the right things to help yourself achieve a bright financial future—regardless of which type of savings vehicle you ultimately choose.