Account Comparison: Money Market vs High-Yield Savings

With interest rates on the rise, more people look to money market accounts (MMA) and high-yield savings accounts (HYSA). Both are a reasonable avenue for short-term reserves. But what’s the difference? Which is better?

Money Market Account

A MMA is a hybrid checking and savings account offered by banks and financial brokerages that pays interest at a variable rate. Current rates as of December 2023 hover around 5%.

Deposits are held in an account comprised of short-term debt, treasuries, and cash. The return of these short-term investments mirrors the market interest rate set by the Fed. Basically A = B = C. Just think about a MMA mirroring the Fed’s interest rate.

MMAs typically allow the owner to transfer money like any bank account. Some banks allow a debit card tied to the account. Most also allow owners to write up to 6 checks per month from the MMA.

There is often a required minimum to open and maintain a MMA. Failure to adhere to the minimums results in fees.

There is often a fee to holding the account. Vanguard’s VMFXX has an expense ratio of 0.11 or $11 for every $10,000 invested. From what I can find, typical expense ratios are between 0.08 and 0.40.

Banks and credit unions offer Federal Deposit Insurance Corporation (FDIC) protection on MMAs up to $250,000 for individuals and $500,000 for joint accounts. Brokerages may insure accounts up to $500,000 under the Securities Investor Protection Corporation (SIPC).

For most intents and purposes, SIPC and FDIC protection is the same. SIPC is for cash and securities held at brokerages. FDIC insurance is for deposits at banks. SIPC requires investors to file a claim prior to a deadline. This claim typically takes a while to process.

High-Yield Savings Account

A HYSA is similar to a standard savings account but pays about 10x as much in interest. Online banking greatly improved access to HYSAs. Traditionally, customers would open a checking and savings account at a single bank for ease of transfer. Now, electronic transfers are simple and there isn’t a need to have both accounts with a single bank.

The online banks specializing in HYSAs stick to just that. They don’t typically offer too many more accounts, options, or features. They entice customers with a far greater return than a standard savings account.

Instead of being invested in treasuries, HYSA dollars are loaned out. Banks make money off the delta between the 5% HYSA rate paid to the account holder and the 7.5% return from loaning out the money in the form of a mortgage or car loan.

I was having difficulties finding the exact article I read before, but I believe banks are required to hold only 10% of the deposits. Please comment if this is incorrect. This means 90% is loaned out. This 90% is where banks make their money.

HYSAs typically allow the owner to transfer, deposit, and withdraw money like any other savings account. However, the number of monthly withdrawals may be limited.

As with most bank accounts, there is typically a required minimum to open and maintain a HYSA. If you shop around, you may find an account without a minimum. Keep in mind, failure to adhere to the minimums will result in fees.

As with MMAs, HYSAs offer variable rates of return influenced by the Federal interest rate, so they too are hovering at 5%. Some HYSAs only offer the high rate of return on a portion of the account (up to XYZ dollars) or limit the total interest earned per month. Read the fine print before you apply.

Banks offer FDIC protection on HYSAs up to $250,000 for individuals and $500,000 for joint accounts.

TL;DR Similarities

They both pay a rate similar to the Fed, may have account minimums, and are insured for similar amounts. Interest or dividends are taxable unless held in a tax-advantaged account.

TL;DR Differences

Dollars in the account go different places. Banks and brokerages offer MMAs whereas online banks specialize in HYSAs. MMAs typically have a management fee. HYSAs may limit the interest earned.

When to use these accounts?

This is short-term reserve territory. The interest rates may lose to inflation, so try not to keep the bulk of your nest egg here.

Since rates are far better than they were a year ago, both MMAs and HYSA are great places for an emergency fund or savings for an upcoming purchase at this time. Because rates are variable, keep an eye on the Fed rate because it will influence your returns.

What do we use?

Mrs. TFC and I use a Vanguard Money Market Account. We do this because we have most accounts consolidated with Vanguard for ease. We typically keep a 6-month emergency fund here. When saving for her 4Runner this past year, the MMA worked well.

And lately, I have been storing a bit of extra cash here instead of funneling it into equities.

I hope you found this quick comparison useful. Thanks for reading!