Savings Accounts vs Money Market Funds: Which is Right for You?

In the current interest rate environment, it’s more important than ever to choose the right investment vehicle for your cash. Both savings accounts through traditional banking institutions and money market funds offer a safe place to store your money and earn interest, but there are some key differences between the two. 

Savings Accounts 

Savings accounts are a type of deposit account that typically offers a lower interest rate than money market funds. However, savings accounts are also more accessible, with no monthly fees and no minimum balance requirements. This makes them a good option for people who need to be able to access their money quickly and easily. 

Savings accounts are the preferred place for your household working capital and cash flow.  How much you have in bank savings accounts depends on your monthly expenses and the reliability and consistency in your monthly income.  Speaking with a financial planner can help you determine an appropriate balance to have in savings accounts. 

Savings accounts also offer FDIC Insurance up to applicable levels. 

Money Market Funds 

Money market funds are a type of mutual fund that invests in short-term debt securities. They typically offer a higher interest rate than savings accounts, but they also have some restrictions. For example, money market funds may have a minimum balance requirement and may charge a monthly fee. 

Money market funds recently reached an all-time high in assets under management, passing $5T in AUM in March of this year.  It is reasonable to believe the minuscule interest rates of bank savings accounts and the concerns with the banking system and recent bank failures have fueled this inflow to money market funds.  However, some investment professionals have issued warnings about money market funds and the risks involved.   

Not all money market funds are built the same and what they invest in can differ greatly.  Funds offering higher rates most likely invest in assets other than just US treasuries.  Investors point out potential issues created by the Federal Reserve repurchase agreements inside many money market funds.  Not to mention those of us that remember when money market funds broke the buck during the 2008 Global Financial Crisis.  

The interest rates your receive in money market funds most likely outweigh the risks involved, but unlike savings accounts market funds do not offer FDIC Insurance either. 

Is there a better choice? 

Possibly, and it may not be either of the previous options.  What about holding cash on an investment custodian platform like Interactive Brokers (IBKR).  They do not offer interest on cash balances below $10,000, however they do offer one of the best rates on cash above that level.  IB’s cash rate is currently 4.58% for qualifying accounts.  

What does that mean? Accounts with a Net Asset Value of $100,000 or more receive 4.58% on every dollar above $10,000 with interest credited to the account at the end of each month.  This is liquid cash with no lock-up period and unlike money market funds does not invest in short-term debt securities. 

If you are interested in utilizing what our custodial platform has to offer, please visit our contact us page here or give our office a call directly.  One of our advisors will discuss in greater detail all these options and help you design a cash management program that fits your exact needs and profile.   

Just like the cash options discussed here; no two investors are exactly similar.  Discover what makes our process a little different.