A savings account is detrimental to your financial health as it keeps your money safe and grows your savings according to a set of interest rates. However, there is also a money market fund, which earns a more favourable interest rate than most savings accounts.
In this simple guide we breakdown the differences between a money market fund and a savings account, and also provide some tips/special considerations on which one you should choose.
What Is the Difference Between A Money Market Fund & Savings Account?
A savings account is a bank account that earns interest on your balance to boost your savings. The interest rate is set by the bank and sometimes may vary with balances i.e. higher rates with higher balances. The best savings accounts are those that have a high-interest rate, low fees and fewer restrictions on transactions i.e. transfers and withdrawals.
On the other hand, we have the money market fund, earns more interest as the funds are invested in financially reliable securities that have an average maturity of fewer than 120 days. They include government-issued securities and other debt instruments that are regarded as low risk.
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The key differences of the money market fund and savings fund are as follows:
Accessibility
A money market fund is less accessible than a savings account. The process to withdraw money tends to take a little longer than that of a bank account.
You can withdraw your money from your savings account instantly at the bank’s cashier with a withdrawal form. As for money market accounts, you need to send out a request a few days before you actually need the money.
Returns
The returns offered by money market funds tend to be higher than savings accounts. Usually, savings accounts offer returns between 1-5% while money market funds offer a varied interest rate of about 6%-13%.
Fees
The main problem with these accounts is the fees they attract.
A savings account attracts withdrawal fees to limit such transactions and high minimums balance to keep the account open. There are some banks that limit access to the account by asking you to forfeit interest of the month when you withdraw.
With money market accounts, there may be balance requirements too and transaction fees too. Additionally, money fund funds also attract management fees, typically about 2-2.5%.
Taxes
With money market funds, interest income can be taxed. This typically depends on what sort of securities the fund invests in. Therefore, while you decide to invest, choose a fund that meets your tax needs.
Learn More: Is the Bank A Place to Save Money?
Special Considerations
- If you are tempted to withdraw your funds all the time, then choose to invest in a money market fund as they typically are a little more difficult to liquidate as compared to savings accounts.
- If you have a hard time habitually saving, try using a savings account. You can link your savings account to your regular transactional account to automate savings and make it regular.
- Save where interest earned exceeds the current inflation rate, to preserve your initial capital.
- Take into account tax on interest income, withheld by the bank or not.
- Opt for where interest is compounded either daily, monthly, quarterly or half-yearly. The more often, the better.
- Consider the ease of access in the event of an emergency.
- Take note of the withdrawal costs of the account and any penalties attached to it.
It is important to note that there are some banks that have money market funds, in which case you can easily automate your savings from your account directly to money market fund.
Learn More: 8 Easy Ways to Invest With Little Money
All in All
If you aren’t already saving and investing your savings, start small and start today. All in all, your first investment into financial security needs to start somewhere and at some time. Why not today?
Happy Saving!
Image credits: Top by Joslyn Pickens from Pexels