High-yield savings account vs. money market fund: Which is better?
Yields on money market funds and high-yield savings accounts have risen sharply over the last two years in response to Federal Reserve benchmark interest rate hikes. Investors can now earn decent returns on savings accounts and other short-term investments after years of rates sitting near zero.
High-yield savings accounts and money market funds are two options investors often consider to create an emergency fund or park cash earmarked for a short-term goal, like buying a car. They’re both great compound interest investments, offering a decent return for very little risk.
While both offer perks, including easy access and stability, there are some key differences to be aware of between money market funds and high-yield savings accounts. Here’s what you need to know.
What is a high-yield savings account?
High-yield savings accounts are generally available through online banks and offer higher rates of interest than traditional bank savings accounts.
The national average savings account pays a 0.61 percent APY as of September 2024, according to a recent Bankrate survey, while the best high-yield savings accounts come with interest rates above 4.3 percent.
High-yield savings accounts function similarly to traditional savings accounts and may limit the number of withdrawals you can make in a month. They’re also FDIC-insured, which means you’re covered up to $250,000 per account holder if your bank fails.
You won’t earn significant long-term returns, like you might by investing in a brokerage account or Roth IRA, but a high-yield savings account can make your cash work harder without taking on risk.
What is a money market fund?
Money market funds are short-term investments offered by banks, brokers and mutual fund companies that invest in short-term securities such as certificates of deposit, U.S. Treasury bills and commercial paper. Money market funds aim to maintain a share price of $1. There have only been a few instances where a fund fell below that level, or “broke the buck,” but the funds are not guaranteed.
Yields offered by money market funds depend on the current interest rate environment and tend to respond quickly to Fed policy. Money market funds can be a nice way to earn a return on your short-term savings, but aren’t likely to build significant wealth over time.
Be sure to pay attention to a money market fund’s expense ratio, which is the fee charged by the fund. This comes out of the return you earn as an investor, so it’s better to have low fees, all else being equal.
Many investors confuse money market funds with money market accounts. Money market accounts are products offered by banks or credit unions as a savings tool and come with FDIC insurance, whereas money market funds are not FDIC-insured.
High-yield savings accounts vs. money market funds
High-yield savings accounts and money market funds both present solid choices when it comes to investing your savings. Here’s what to know about each:
| High-yield savings accounts | Money market funds | |
|---|---|---|
| Are you able to access your money? | Yes, but may be limited to a certain number of monthly withdrawals | Yes |
| Is the account FDIC-insured? | Yes | No, but low risk |
| What is the interest rate? | Significantly higher than traditional savings accounts | May be higher than high-yield savings accounts |
| Are there fees? | None | Whatever the fund’s expense ratio is |
The bottom line
High-yield savings accounts and money market funds are good ways to earn a decent return on your cash and short-term savings. The key difference between the two is that high-yield savings accounts are FDIC-insured, while money market funds are not. However, money market funds are considered very low-risk investments and may even have higher interest rates than high-yield savings accounts.
Check out Bankrate’s list of the best money market funds before deciding which to choose.
— Bankrate’s Rachel Christian contributed to an update.
