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What’s the Difference Between Savings and Money Market Accounts?

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A guide to help you understand your options

When you save your money at a financial institution, you can often choose between a savings account and a money market account. When you look at both accounts, you'll likely notice that the interest rates vary - but that's not the only difference between the two.

Savings account

A savings account is an FDIC-insured (up to certain limits) account that earns interest derived from the financial institution's lending activities, because they are generally only permitted to invest their clients' savings deposits in loans they give. This helps limit the risks that the institution takes with its depositors' money, because in order to borrow money, borrowers must prove that they are a relatively safe risk.

Money market account

Like savings accounts, money market accounts are FDIC-insured up to relevant limits. But money market accounts often have a higher interest rate than savings accounts, because financial institutions are able to invest money market deposits in a broader range of vehicles, such as bonds, Treasury notes and certificates of deposit. This increases the amount that the institution can earn on these deposits and, as a result, the interest they pay.

Money market fund

Another product, called a money market fund, is available from some financial institutions and brokerage firms. This instrument is like a mutual fund. Unlike a money market account, a money market fund is an investment that you buy a piece of. Its underlying value comes from low-risk investments such as bonds, and unlike money market accounts, funds are not FDIC-insured, although they may be covered by the Securities Investor Protection Corporation (SIPC) if your financial institution becomes insolvent.

The decision to have a savings account or money market account is not all or nothing. It could be that the best option for you is to put some money in both. If you have any questions, let us know and we can discuss the benefits of each.

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