When thinking about opening a bank account, most people often just go for the traditional: checking and saving. Most do not know that there are a vast variety of accounts one can open. There are traditional savings accounts, passbook savings, certificates of deposit (CDs) as well as money market accounts. I will be specific in explaining the difference between a money market account and a traditional savings account.
Money market accounts and savings accounts have a lot of similarities. They are both FDIC insured, but be careful to understand the difference between money market accounts at traditional financial institutions, such as a bank, versus a money market fund at an investment company. Money market funds at these institutions are not FDIC insured.
Money market accounts at financial institutions earn interest and have no withdrawal penalties. The main purpose of money market accounts is to serve as a deposit account that pays interest based on money market rates. This type of account generally has high minimum balance requirement and has features of both savings and checking accounts. Since the money market account has features of a checking account, this allows you to receive a debit card if you open this account; however, be aware of any fees overall.
On the other hand, the main purpose of savings accounts is to save the money that you receive and earn interest, but savings accounts only allow a limited number of withdrawals. These accounts let customers set aside a portion of their liquid assets while earning a monetary return.
Ultimately, according to Katherine Anderson, Vice President of Wintrust Bank, there really is not ONE better option. It’s mostly about which has the highest interest, which account meets your needs and which account you prefer. Also, it is key to know that with a money market account there is often a minimum opening deposit (the money you put in the account to open it) of $100 or more as well as restrictions or limits on access to your money. On the other hand, with a traditional savings account you have immediate access to your money and lower minimums, but you are limited to 5 or 6 withdrawals per month.
With either account be sure to shop around for the best rates. Moneyrate.com noted online savings rates from 1.9% to 2.20%, but the minimums or deposit requirements vary and these rates change frequently. https://www.money-rates.com/best-savings-account.htm.
All in all, either type of account is a great choice, but it is good to be diverse or to have your investments and savings in a variety of products that meet your needs. It is also smart to learn about the many types of savings accounts there are available.
On the Money would like to thank Republic Bank for their sponsorship of this issue and for hosting our interns in One Summer Chicago.