High-yield savings account vs. money market fund (2024)

With the Federal Funds effective interest rate at its highest level in over twenty years, savers are anxiously trying to find places to get the best return on their cash holdings. Both high-yield savings accounts and money market funds are potentially attractive options for savers trying to get higher-than-average returns on their cash balances.

However, there are some key differences between the two types of accounts. The main difference is that a high-yield savings account is a bank account and a money market fund is an investment account.

This is an important distinction because it affects aspects of the accounts such as the rates, the fees, the type of insurance the account qualifies for and how you access the account.

The basics of a high-yield savings account

As the name implies, high-yield savings accounts are a type of savings account that pays a higher interest rate than the average savings account.

For example, according to FRED, the average savings account is paying 0.46% interest. Whereas the high-yield savings accounts from American Express, Synchrony and LendingClub banks currently range from 4.35% to 5.00% APY.

The interest rate on a high-yield savings account is not fixed and may move up or down after the account is opened.

You may notice that high-yield savings accounts are often offered by online-only banks. This is because they have lower costs since they don’t have to maintain physical branches.

Additionally, high-yield savings accounts are provided by banks that typically carry FDIC insurance since savings accounts are considered deposit accounts. This coverage provides up to $250,000 of deposit insurance per account type per depositor per institution. Credit unions carry NCUA insurance, and it works the same way as FDIC insurance.

This insurance means that if the bank or credit union goes out of business, your funds will be returned to you, no matter what. If the institution doesn’t have enough cash to give everyone their money, the insurance will kick in and ensure everyone’s funds are replaced.

The basics of a money market fund

Money market funds are not depository bank accounts but are actually a type of investment. Specifically, they are a special type of mutual fund that invests in highly liquid assets.

Money market funds often vary in the specific assets they invest in based on the type of investor they are designed for. For example, a particular money market fund may focus on tax-exempt municipal securities to attract investors looking for interest income that is not subject to federal income taxes.

For investors comfortable with taxable interest another money market fund may focus on short-term corporate and bank debt securities.

A money market fund works like a mutual fund, where ownership of a share represents a proportional share to the owner of the underlying investments and earnings within the fund.

However, money market funds are different from other mutual funds in that they set their net asset value (NAV) at $1.00 per share and typically invest in bonds. As the underlying investments produce income, the fund pays out dividends. This allows the fund to mimic how a depository bank account works.

While money market funds are generally considered low-risk compared to most other investments, they are not risk-free. For example, money market funds are generally only allowed to have their per share NAV fluctuate within half a cent of $1.00. So if the underlying value of the assets caused the per share NAV to fall below $0.995, the investors would likely lose money.

This phenomenon is referred to as “breaking the buck,” and while it is rare, it can happen, as it did during the 2008 financial crisis.

Money market funds do not qualify for the FDIC or NCUA insurance coverage the way high-yield savings accounts do. Instead, money market funds qualify for Securities Investor Protection Corporation (SIPC) protection of up to $500,000. This coverage only protects against the failure of the brokerage firm holding the money market fund, it does not protect against a decline in the value of the fund itself.

The rate of return on money market funds is highly dependent on both the underlying investments held in the fund and the current market conditions. So the interest income earned within the fund will go up and down regularly as market conditions change. Here’s a more in-depth look at money market funds.

Comparing high-yield savings accounts and money market funds

Insurance

The chief difference between high-yield savings accounts and money market funds is the respective designations as a bank account vs. an investment — which therefore affects the type of insurance coverage it qualifies for.

As previously mentioned, high-yield savings accounts can be opened at banks and credit unions and will generally qualify for up to $250,000 of FDIC or NCUA insurance per depositor per institution. This means that both principal and accrued interest will be returned to a depositor if the bank or credit union providing the account fails.

On the other hand, money market funds are purchased at brokerage firms and have underlying securities such as government securities, tax-exempt municipal securities or corporate and bank debt securities. They are also covered by SIPC insurance of up to $500,000.

Keep in mind that SIPC insurance does not protect against a decline in value. It simply provides that if an investor had $500,000 or less worth of securities in the brokerage firm that failed the investor would get their money returned. The SIPC also limits $250,000 of the total coverage for cash balances, but money market funds are considered securities, not cash, so the higher $500,000 limit is applicable.

Fee structures

For high-yield savings accounts, some may charge monthly maintenance fees, minimum balance fees or fees for exceeding withdrawal/transfer limits. Other accounts may not have minimum balances or fees but may close accounts for exceeding withdrawal limits.

For example, as of February 2024 Ally Bank’s high-yield savings account has no monthly maintenance or excessive transaction fees, but they will close the account if the transaction limit is exceeded on a, “more than occasional basis.”

Money market funds have the same fee structure as other mutual funds, where the total expenses of a fund are captured by the expense ratio. Specifically, the expense ratio is expressed as a percentage and represents the fund’s total operating expenses for the year over the fund’s average net assets.

For example, an expense ratio of 0.20% would mean an investor with $10,000 of average balance in the fund could expect to pay $20 in fees annually. Any income earned from the fund is reduced by these expenses so understanding this complete picture is important in determining how much a given fund will produce in net income.

Both expense ratios and investment minimums are different from fund to fund and should be reviewed closely before making any investment choices. Some money market funds also have withdrawal limits, so if you expect to make frequent withdrawals, you should ensure you won’t run afoul of those restrictions before investing.

Minimum balance requirements

For high-yield savings accounts any minimum balance requirement will be disclosed by the bank or credit union in the materials offering the account. In addition to paying attention to these restrictions, you should notice whether failure to maintain the minimum balance will result in fees or closure of the account.

A related balance restriction to be mindful of is balance tiers, where only certain account balances are eligible for a specific interest rate.

For example, a bank may advertise an account as having a 5.50% APY but the balance tier details reveal that the rate only applies to balances up to $5,000 and the APY is lower for balances over that amount. Or, a bank may do the inverse where balances below $5,000 only pay a 3.00% APY but balances over $5,000 pay a 5.50% APY. It is incumbent upon you to confirm whether there are any balance tier restrictions before opening an account.

For money market funds there may be applicable investment minimums required to invest in a given fund. For example, as of February 28, 2024, Charles Schwab was offering two different prime money market funds, SWVXX and SNAXX. As of that date, the two funds had 7-day yields, with waivers, of 5.19% and 5.34%, respectively.

However, there was no minimum investment in SWVXX whereas the minimum in SNAXX was $1,000,000.

Check writing and debit card access

For high-yield savings accounts, like other savings accounts, Federal regulations prohibit check writing or debit card purchases. Limited card access may however be granted to make withdrawals, similar to transfers that can be made between high-yield savings accounts and other bank accounts. For example, LendingClub Bank NA offers a high-yield savings account with ATM card access.

Since money market funds are mutual fund investments, rather than depository bank accounts, you can generally only get cash out of them in two ways.

First, when dividends are paid from the fund, you will receive them as cash if you choose not to reinvest them.

Second, you can sell your interest in the fund for cash. Note that mutual fund sales occur at the close of business and there may be additional time before the funds are settled and can be transferred to another account. You do not need to liquidate your entire account to access the cash.

Determining the better option: High-yield savings account or money market fund

When asked about the decision between high-yield savings accounts and money market funds Dustin Rinaldi, CFP of Rinaldi Wealth Management said the following:

“It’s important to note that exceptionally high interest rates on savings accounts are often temporary and designed to attract new customers. Money market [funds] typically yield higher interest rates compared to savings accounts, yet they lack FDIC insurance. Concerned clients often choose the added safety of money markets invested solely in government securities.”

Besides rates, you’ll also want to consider how long it takes to access your funds.

For example, if you want to transfer money from a high-yield savings account at one bank to a checking account at another bank; you only need to worry about the time it takes the deposit to clear at the bank holding the checking account until you have access to the funds, which is typically one to five days.

Getting cash into a checking account at a bank from a brokerage firm that holds a money market fund may take longer. Specifically, you must first sell at least a portion of your interest in the money market fund, which will generally take effect at the next close of business. So if you process the sale before 4 PM Eastern, you’ll generally have access to those funds the next business day.

From there you then need to account for the time for the deposit to clear at the bank with the checking account. Typically a money market fund will add at least one business day until you can access those funds compared to a high-yield savings account.

The ultimate decision between the two comes down to personal preference and risk tolerance. For high-yield savings accounts with full-balance FDIC or NCUA insurance, a depositor is fully protected from loss in a bank failure, avoids market risk altogether and has quicker access to the funds at the likely cost of a slightly lower return on investment.

For money market funds you likely gain a slightly higher return but also have slightly less protection against loss with the SIPC insurance since it doesn’t cover a loss in value of the underlying investment. The money market fund also comes with an additional delay in access to the funds when needed.

As with all financial decisions, the particular high-yield savings account and money market fund details should be considered before committing to either one.