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Money Market vs Savings Accounts: Are Your Funds FDIC Insured?

Written by Banks Editorial Team

Updated April 21, 2021​

3 min. read​

When deciding where to put yours savings, it is imperative you understand the difference between money market vs savings accounts. You may consider placing some of your available cash into a money market fund, but do you really understand what’s different between a money market vs savings account? The first thing you should understand is FDIC insurance and what it means for you.

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What is FDIC Insurance?

FDIC Insurance is a protection offered to consumers by the federal government. FDIC means “Federal Deposit Insurance Company” and it protects those who deposit money into an institution where FDIC insurance applies in the event of the failure of the institution. Most banks are FDIC insured, while credit unions are not. Credit unions still offer protections to consumers in the form of National Credit Union Share Insurance Fund (NCUSIF). Both funds are designed to protect those who deposit funds in amounts up to $250,000.

FDIC was started in 1933 and is backed by the “full faith and credit of the United States government”. NCUSIF was created by Congress in 1970 and offers the same backing as FDIC insurance.

What is a Money Market Fund?

When attempting to understand the differences between money market vs savings funds, it is important to know how each works. Nearly anyone with any amount of money can open a savings account at their local bank or credit union. Money market funds are a form of mutual fund and they invest in “safe” securities like U.S. treasury bills and other forms of commercial paper. They are not designed to be savings accounts, instead they are considered an investment account. Money market funds should not be confused with Money Market Deposit Accounts (MMDAs) which are a form of savings accounts which offer higher yields than standard savings accounts.

MMDAs are usually offered by banks or credit unions and instead of investing in treasury bills, they are invested in Certificates of Deposit (CDs) and other “liquid” investments. Unlike money market funds, MMDAs are typically FDIC insured.

The Best Option: Money Market vs Savings

Each person must decide which options work best to meet their needs and their financial goals. When determining between a money market account or a savings account, the main determinant is usually how much risk you are willing to accept. For those who are “risk-adverse”, a savings account is typically a better option. However, if you prefer a higher yield, money market funds may be the better option.

When someone is saving money over long periods of time, like saving money for your child to attend college five or more years into the future, a money market fund may be the best option because it tends to pay a higher interest rate. Before determining if your best option is a money market account or a savings account, you should carefully review any documentation associated with the account.

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Money Market Account and Savings Account Basics

Most money market funds offer checks and some offer ATM cards to allow those who have funds on deposit to access their funds. However, unlike savings accounts, nearly all money market funds have minimum deposit amounts. There are often restrictions on how much money you may withdraw from your account. Savings accounts are generally used for shorter-term savings while those who are investing in money market funds tend to be thinking more long-term.

For some investors, a money market fund is a “holding area” for funds they wish to use for other investment opportunities. An example of this is if you have an account with a mutual fund company and liquidate shares in one of your accounts, the proceeds may be automatically deposited into your money market fund for later use. Savings accounts in general require the owner of the account to manually deposit or withdraw funds from the account.

The Risks of Money Market vs Savings

When you deposit money into your savings account, you are guaranteed to be able to withdraw the amount you deposited plus interest earned on your principal at any time. The principal, that amount which you deposit, is guaranteed to be there when you decide to use the funds. While money market funds are generally considered secure, they do not come with the guarantee of being there when you go to withdraw the funds. This is because they are not considered savings accounts, money market funds are considered investment accounts which means they do have risks associated with them.

Money market funds are valued using a formula known as NAV or net asset value. Generally, a money market fund’s NAV is $1 per share and holds steady although there have been cases where the NAV has dropped below this amount such as the day after Lehman Brothers Holdings Inc. filed for bankruptcy when their money market fund dropped to $.97 per share. While the federal government stepped in to make sure investors did not suffer a loss in their money market funds, there is no obligation for them to do so. Make sure you understand the risks of money market vs savings accounts before you determine where to place your funds.

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