If you’re a saver who values lower-risk investment options, money market funds and high-yield savings accounts are two popular solutions you may want to consider. Both typically offer convenient access to your money when you need it and feature other attractive benefits.
Yet despite their similarities, money market funds and high-yield savings accounts work differently in a few key ways. So, it’s important to evaluate your specific situation and financial goals before choosing one over the other.
Read on to learn more about money market funds vs. high-yield savings accounts, and how to determine if either one is a good fit for you.
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A money market fund is a type of investment fund, also known as a mutual fund, that’s regulated by the Securities and Exchange Commission (SEC). With money market funds, you can invest your cash into a low-risk pool of assets. These assets may include liquid, short-term debt securities (e.g., U.S. Treasury bills, corporate bonds, municipal debt), cash, and cash equivalents.
Compared to other mutual funds and stocks, money market funds are traditionally made up of low-risk investments. But as a trade off, money market funds have also earned historically lower returns. As a result, money market funds may appeal to risk-adverse investors who are most concerned with trying to protect — rather than aggressively grow — their nest eggs.
Also, keep in mind that money market funds aren’t the same as money market accounts. A money market fund is a type of investment, while a money market account is a type of deposit account, similar to a checking or savings account.
Although the risk is low, there is a small potential for loss with a money market fund if the value of your investment falls. On the other hand, your balance in a money market account or other type of deposit account is typically protected by the FDIC up to $250,000 per depositor, per institution, per ownership category.
Read more: Money market account vs. money market fund: What’s the difference?
A high-yield savings account (HYSA) is a type of deposit account that often features a higher annual percentage yield (APY) than a traditional savings account. In fact, some of the best high-yield savings accounts currently feature interest rates that are over 10 times the national average for savings accounts. Because you’re earning more interest on your savings, the money you deposit can grow at a faster rate.
Read more: The 10 best high-yield savings accounts available today
High-yield savings accounts can also be an attractive choice for savers who want easy access to their money at any time. With this type of account, you can generally make withdrawals from your savings balance as needed, without penalty (although some banks impose a limit on the number of withdrawals you can make each month.)
Additionally, as long as you open an HYSA at a federally insured bank or credit union, you can also rest easy knowing that your deposits are protected up to $250,000 in case the institution fails. And your balance can never lose money due to market fluctuations.
Read more: Can you lose money in a high-yield savings account?
That said, it’s important to consider the drawbacks of HYSAs as well. In particular, the rates that these accounts feature are variable, meaning the bank can decide to increase or lower the rate at any time.
Plus, even though the interest rates on HYSAs tend to be competitive compared to some other deposit accounts, they still tend to offer lower historical returns than investments such as stocks, bonds, and mutual funds.
Depending on your financial goals, money market funds and high-yield savings accounts could both make solid solutions for your savings. They both allow you to access your funds without penalty in most cases, and are relatively low-risk savings solutions.
Yet before you deposit your money into a money market fund or a high-yield savings account, it’s wise to review the key differences between these accounts to help inform your decision.
You can open a high-yield savings account at many traditional banks, online banks, and credit unions. However, it’s important to choose a financial institution that’s a member of the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).
You can purchase money market funds from fund providers (e.g., Vanguard, BlackRock, etc.), through an online brokerage account, or through a bank. Keep in mind that even if you buy a money market fund through a bank, the investment won’t come with FDIC insurance — but money market funds are insured by the Securities Investor Protection Corporation (SIPC) for up to $500,000.
An online broker may also be able to help you select money market funds you can purchase from multiple providers.
High-yield savings accounts don’t usually come with monthly fees, especially those offered by online banks. However, some banks or credit unions do charge monthly fees for these types of deposit accounts, so it’s important to shop around and compare offers.
With money market funds, it’s important to keep an eye on the expense ratios of the funds in which you choose to invest. In 2023, the average expenses ratio for money market funds was 0.22% — an average of $22 for every $10,000 invested. Yet some money market funds may feature higher or lower costs.
You might also have to pay liquidity fees to access your cash during times of high market stress. To find the fee information for a specific fund, check with your online broker or the fund’s prospectus for details. Remember, if you’re already earning relatively low returns on a money market fund, any outgoing fees can easily offset those earnings.
The minimum deposit requirements for high-yield savings accounts are often easy to satisfy for savers with limited cash resources. In fact, you can often find offers for HYSAs with no minimum deposit requirements.
Read more: What’s the typical minimum balance for savings accounts?
When it comes to money market funds, minimum investment requirements are more common and may vary to cater to different types of investors. Some money market funds, designed with institutional investors in mind, feature high minimum investment requirements. Meanwhile, you may find funds with much lower or even zero initial investment requirements.
The potential earnings on high-yield savings accounts and money market funds work in different ways. But with both types of financial instruments, your earnings have the potential to change over time with the market.
With high-yield savings accounts, the money you deposit earns a variable interest rate. The bank or credit union will disclose the annual percentage yield (APY) it’s paying customers at the time you open your account. So, you can shop around and compare rates to find the best deal available. But it’s also important to remember that APYs are subject to change over time.
Read more: What is annual percentage yield (APY)?
Money market funds have a fixed price of one dollar per share. The funds aim to maintain their net asset value (NAV), meaning the money you invest (aka your account value) should only change when you have growth from your earnings. The growth you hopefully experience comes from potential yields your account earns.
You can check the 7-day yield of a money market fund to see what a fund is currently paying out to investors. If you find a money market fund with a 5% SEC yield, for example, you may estimate that it’s currently paying out $500 per year on a $10,000 investment.
With high-yield savings accounts, your earnings may count as income and are taxable during the year you earn them.
Money market funds, on the other hand, come in a few different varieties. Prime money market funds are taxable, but they typically offer higher yields. Tax-exempt money market funds are called municipal funds. These funds usually pay lower yields, but they might be worth considering for investors in higher tax brackets due to their (federal) tax-free earning potential.
Some tax-exempt money market funds limit investments to bonds from a specific state. These funds make it possible for residents of certain states to earn completely tax-free yields (both federal and state).
Money market funds and high-yield savings accounts both represent two low-risk ways to grow your savings. If you’re looking to keep a portion of your cash accessible and earn higher-than-average interest rates compared to traditional deposit accounts, either of these options could be worth considering.
Yet it’s important to recognize that neither of these savings solutions may be the best fit for your long-term retirement needs. Both account types earn historically lower interest rates compared to other investment options. So, you could miss out on significant growth opportunities if you keep the bulk of your retirement savings locked away in high-yield savings accounts or money market funds alone.
If you’re not sure where to save or invest your money for the future, it might be time to meet with a certified financial planner (CFP). A trustworthy financial advisor can help review your specific financial goals, answer questions, and create a plan for your financial future.
