Money Market vs. High-Yield Savings

In regard to earning interest on your investment, traditional savings accounts do not compete with money market accounts. But high-yield savings accounts may offer a viable alternative for the conservative investor. When you're shopping around, it's important to distinguish between money market accounts – which are deposit accounts offered through banks and credit unions – and money market funds – which are relatively secure investment vehicles but are not covered by FDIC insurance, meaning they put your principal and interest at a little risk.

Traditional savings accounts once had the edge over money market accounts, or MMAs, because you could open them with a minimal amount of money. But high-yield savings accounts may not offer this same flexibility. In some cases, high-yield savings accounts require a high opening deposit.

If you dip below the minimum, you might sacrifice your higher interest rate for a lower one or trigger a financial penalty. Most MMAs have specific requirements regarding your opening balance.

One of the differences between high-yield savings accounts and money market accounts concerns their flexibility. Most savings accounts allow unlimited transactions, including deposits, withdrawals and transfers, in a given month. Money market accounts, while often coming with checkbooks and even debit cards, do not have this option.

Federal requirements on MMAs limit you to six transactions per month, including checks, cash withdrawals and transfers. Any additional transactions will trigger a financial penalty.

Traditionally, the lure of MMAs was that they offered higher interest rates than savings accounts. But some high-yield savings accounts, often offered by online banks or through membership in credit unions, have interest rates that compete with their money market counterparts. The catch is that, in both cases, you may need a higher opening balance to access the best interest rates.

Two relatively high-yield accounts, insured by the FDIC and with an interest rate that can fluctuate daily, seem to offer the same benefits for the conservative investor. But most people use savings accounts and money market accounts differently.

If you open a high-yield savings account, you may connect it with your checking account and set up the accounts for automatic transfers or deposits so you can build your savings automatically. The same cannot be said for MMAs, which require more observation to ensure you meet with regulations. People tend to use MMAs for long-term savings they do not plan to touch, and high-yield savings accounts for shorter-term financial goals.