Over the past couple of years, yields on money market funds and high-yield savings accounts have seen a significant increase in response to Federal Reserve interest rate hikes. This has allowed investors to earn decent returns on their savings, a welcome change after years of low interest rates.
When it comes to creating an emergency fund or saving for short-term goals like purchasing a car, investors often consider high-yield savings accounts and money market funds. Both options offer the benefit of compound interest, providing a good return with minimal risk.
While both high-yield savings accounts and money market funds offer advantages such as easy access and stability, there are key differences between the two. Here’s a breakdown of what you need to know.
Understanding High-Yield Savings Accounts
High-yield savings accounts are typically offered by online banks and provide higher interest rates compared to traditional savings accounts. The national average APY for savings accounts is around 0.61 percent, while the best high-yield savings accounts can offer rates above 4.3 percent.
Similar to traditional savings accounts, high-yield savings accounts may have limitations on monthly withdrawals. Additionally, they are FDIC-insured, providing coverage of up to $250,000 per account holder in case of bank failure.
While high-yield savings accounts may not offer the long-term returns of investments like brokerage accounts or Roth IRAs, they allow your cash to work harder without taking on significant risk.
Exploring Money Market Funds
Money market funds are short-term investments offered by banks, brokers, and mutual fund companies. These funds invest in securities such as certificates of deposit, Treasury bills, and commercial paper, aiming to maintain a stable share price of $1. While there have been rare instances where a fund “broke the buck,” funds are not guaranteed.
The yields on money market funds are influenced by the current interest rate environment and respond quickly to Federal Reserve policies. While they can provide a return on short-term savings, they are not likely to generate substantial wealth over time.
When considering a money market fund, pay attention to the fund’s expense ratio, as lower fees are preferable for maximizing returns. It’s important to note that money market funds are different from money market accounts, with the latter being FDIC-insured savings products offered by banks or credit unions.
Comparing High-Yield Savings Accounts and Money Market Funds
Both high-yield savings accounts and money market funds offer solid options for investing your savings. Here are some key points of comparison:
| High-yield savings accounts | Money market funds | |
|---|---|---|
| Can you access your money? | Yes, with possible limitations on monthly withdrawals | Yes |
| Is the account FDIC-insured? | Yes | No, but low risk |
| What is the interest rate? | Higher than traditional savings accounts | Potentially higher than high-yield savings accounts |
| Are there fees? | No | Expense ratio |
Final Thoughts
High-yield savings accounts and money market funds offer attractive options for earning a decent return on your cash and short-term savings. While high-yield savings accounts are FDIC-insured, money market funds are considered low-risk investments that may provide higher interest rates. Before making a decision, be sure to review Bankrate’s list of the best money market funds.
— This article was updated with contributions from Bankrate’s Rachel Christian.