If you have a personal finance book on your shelf at home, there is a good chance that the author recommends you put your emergency fund savings into a money market account.
Historically, that was good advice as money market accounts have offered higher interest rates than either savings accounts or checking accounts.
However, the opposite has been true for at least the last couple of years.
Right now, some of the money market funds that are typically the best performers are averaging a 7-day yield of between .15% – .05%.
On the other hand, bank savings accounts are paying as much as 1.45% (Nationwide Bank) followed closely with a 1.39% from Ally Bank (rates current at the time of publication, please see respective banks for current rates).
Personally, I think this trend is going to continue for some time. (See comments below about changes to rules for money market funds.)
Let’s look at money market fund basics and savings account basics.
What is a Money Market Account?
As with all other investment opportunities, there are always options that should be looked into before you make your final decision, such as the Discover Money Market Account, to name one.
Once all options have been explored, you should be able to determine which is best for your needs.
Money in a money market is easy to access (liquid). This is important for the money you keep in an emergency fund.
Most money markets give you check-writing privileges, making accessing your money easier. In addition, with a little shopping, you should be able to find a money market fund without fees.
It is important to note that a money market account differs from a mutual fund. This is a common misconception among new investors, so you must understand that the two are different.
A money market deposit account is FDIC insured up to $250,000, which guarantees your emergency fund against a bank failure.
In 2010, the U.S. Securities and Exchange Commission updated rules for money funds. These changes make such investments more secure (theoretically) but also limit the potential yields of the money market funds. Thus, it seems likely that these changes will reduce yields.
With a money market fund, the Interest is a variable rate. This means it will change based on performance.
The money market managers do their best to keep the cost at $1 per share and share any of the additional income through interest payments.
Advantages of a money market account: Safety and ease of access (liquidity).
What is a Savings Account?
Money in a savings account is very easy to access (liquid), which is important for an emergency fund. Depending on your bank, you can typically transfer those funds to a checking account or easily withdraw the money at the bank or using an ATM.
Interest rates at banks do change, but they are fixed because when they set a rate you know you will get that rate until the rate either increases or decreases.
Many banks keep their interest rates for their savings accounts similar to competitors, which may give you more options for your emergency fund savings.
Money in a savings account is FDIC insured up to $250,000.
When shopping for the best savings account, you can typically get the best interest rates from an online account. Here are some of the best savings account interest rates.
Advantages of a savings account: Safe, easy to access (liquid), and competitive interest rates.
Can You Have Both a Money Market Account AND Savings Account?
If the hassle of changing banks and opening a savings account to close it later if money market yields improve does not sound appealing, then you have options.
Call your current money market fund holder and ask about the minimum required balance (without fees).
Keep the minimum amount in your money market fund and open a new savings account. Keep both account types open so you can switch back and forth if interest rates change. You only need to keep the account minimum in the account with the lesser interest rate. This maximizes your earned interest.
This way, you are in a position to easily be able to take advantage of some of the highest interest rates.
Should You Keep Your Emergency Fund in a Savings Account?
In my experience, opening a new savings account online takes about 20 minutes.
Here’s what you need to figure out when comparing money market accounts and savings accounts:
What is your current interest rate on your money market account?
How much more interest could you earn if you switched to a savings account?
Based on your account balance, how much more money would you have at the end of one year. Take that number and ask if it is worth 20 minutes.
In general, if you have an account balance of around $5,000 in a money market account, you will be better off switching to a savings account. But be sure to do your own math.
In my case, I have my emergency fund in an account with Capital One 360. This account is linked to a checking account with Capital One 360, so I can instantly transfer money from my savings account into the checking account and then write a check.
Do you think a money market or a savings account is the best place for an emergency fund?
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April says
I’m in the middle of trying to decide whether or not a savings or a money market deposit account is the better emergency fund of choice. I have other retirement accounts, including 401k, roths, & even a money market mutual fund, but I was looking into this other savings account as a means to earn more dividends. Moving on, I was also concerned adding more dividend earnings will only increase my taxable income, i.e. Tax bracket, so any thoughts? Worth it?
The cash is strictly emergency. Never touch it. It could potentially earn me double what I earn now. It really is pennies when you think about the big world of investing, but it is still free money you earn by letting your money work for you in a rather safer environment.
vickie Mckasson says
I’ve recently experienced just how insecure a money market savings account actually is. It is the actual bank or institute you should be in fear of taking your money if you also have a credit card through the same bank. My husband had a money market savings account and also our mortgage and a credit card. He recently passed away and the bank through a law called Off Setting took all but one dollar out of his money market savings account to pay on that credit card which by the way was not in default. They assured me it was legal and I assured them it was cruel and unethical. I was always under the impression a MMSA for your retirement was safe. My impression seems to be wrong. Any advice on this situation?
Ryan says
Vickie, I’m sorry for your loss. I would contact the bank general manager and ask them to replace the money in the account and set up a payment plan to cover the credit card debt. If they are not willing to do this then I would consult the services of a lawyer to intervene on your behalf.
Virginia says
Have a money market account and the origininal document and deposit slip dated 1982. The bank can’t find any record of it being refunded or not. How do we proceed now? Researched the Comptroller for New York and can’t find anyting.
Ryan says
Virginia, you can check for lost money (see Find Missing Money – Unclaimed Paychecks and Other Property), but other than that, I’m not sure which courses of action are available. best of luck.
Teresa says
I was wondering if anyone might be able to provide any insight as to why an EFT from a Money Market Account (not MMF) would not be considered the same as and EFT from a regular checking account for the purposes of making a contribution to a Health Savings Account. The HSA trustee says that an EFT from a MMA doesn’t meet IRS requirements for contributions. IRS Publication 969 say, “Contributions to an HSA must be made in cash. Contributions of stock or property are not allowed.” I don’t understand why a contribution made via an EFT from a Money Market account would not be considered cash.
fredct says
Doesn’t make any sense to me. They’re likely wrong. Rather than banging your head against a brick wall, how about transferring your money to a checking account and sending it from there?
fredct says
@ Investor Junkie:
I can’t reply in line any longer, so I’ll reply here.
> “Fear mongering would mean what I am stating is false. It is not. You have yet
> to disprove anything and as I show below your statements you counter are
> false.”
Not at all, the most effective fear mongering uses generally accurate statements and tries to add them up to something that far exceeds the sum of its parts. Or says things that are taken out of context as far as their likelihood or probability.
> > “the chance of not having your principal available should you need it.”
> “Tell me what’s the difference then between this and inflation? Yes not losing
> your principal might make you feel warm and fuzzy. In terms of real dollars
> you are losing money with inflation so tell me again what’s the difference?”
The difference is that you know exactly what you have in dollar amounts. When you’re saving for the long ( > around 10 years ) or even medium terms ( > a few years) losing out to inflation is a distinct problem, but that – to me any way – is missing the point of an emergency fund.
An emergency fund is there so that if you need the money tomorrow, you know exactly how much of it you have. If your car breaks down, or your house needs repairs, or you lose your job, you have a set amount of cash available to you. On a short-term basis like that – money needed in the next day, week, month, few months – inflation is not particularly relevant.
Is there a trade off for that? Absolutely. You make a lesser return. But the idea of an emergency fund is security, not maximizing your return. It should not be where the majority of your money is, but it is appropriate for a certain amount of it (a few thousand dollars – for something like 2 to 6 months of expenses).
> “Unfortunately Morningstar does not show yearly returns prior to 10 years
> ago. I do show in 1999 the investor return% (this after expenses and such) was
> -0.89% In 1994 it appears there was a slight (less than 0.5%) net loss.”
I agree, I had the same problem, I couldn’t find total returns going far enough back. The longest back I had was that graph I shared, but its certainly not ideal because it doesn’t show the total return, just the NAV.
> “My point is you obviously do not put 100% into a GNMA funds. What you do
> is asset allocate into what are better performing assets during that time period.
> In today’s market a TIPs fund also makes sense to be into per my original
> reason of inflation.”
That’s good, because I honestly felt it came across differently. I think it could’ve been read as “hey everyone, look at this new miracle investment I found! Extra gain with basically no risk!”
There’s a lot of bs like that in the financial world, so forgive me if my snake-oil-salesman alarm went off prematurely. I just want people to be aware that this investment is riskier (in an principal perspective) than your standard bank account, and then they can decide for themselves how they want to allocate their money.
> > “Currently the GNMA fund is yielding closer to 3%.”
> “And where do you get this stat? The yield is 3.59% currently and if the NAV
> value increases it is more than this.”
Right, that’s ‘closer to 3%’ than it is to the 6%+ you quoted. That’s all I meant.
Listen, we don’t disagree that much. The GNMA looks like a good, fair stable investment. It’d serve terrifically for many purposes. But even if it hasn’t yet, it does have the possibility of definite loses if the right financial storm hits. And that’s counter the point of an ’emergency fund’ in my opinion.
An emergency fund is supposed to be your lifeboat in a storm, and putting it in an investment that can fluctuate – even modestly – is a bit like having a lifeboat with a few holes in it. It kind of defeats the purpose to me.
If someone wants to make that election, they can, but I want them to be aware of the pros and the cons and make the selection with open eyes.
Investor Junkie says
“The difference is that you know exactly what you have in dollar amounts. When you’re saving for the long ( > around 10 years ) or even medium terms ( > a few years) losing out to inflation is a distinct problem, but that – to me any way – is missing the point of an emergency fund.”
True as far as exact dollar amount. For me that doesn’t worry me as much as inflation.
At least from my experience it comes down to:
– how often do you need access to your emergency fund (much less than people think)
– If you have it allocated into different “secure” assets how long would it take to make them into liquid cash. CD laddering is one example.
My point is if you asset allocate your emergency savings you can ensure overall principle yet, and get a ROI.
“it should not be where the majority of your money is, but it is appropriate for a certain amount of it (a few thousand dollars – for something like 2 to 6 months of expenses).”
This is the beef I have. If it’s 6 months (say $21,000 in my example) that’s a big chunk of change to most people. In the current environment that’s earning almost nothing. You more than likely wouldn’t need all of it initially. So maybe from an asset allocation stand point, put say one month into a MM account, and the remaining 5 months into other “safe” assets (GNMAs could be part of it) that can be converted to cash quickly. You get the best of both worlds. You have quick cash, yet also have your money increasing in value over time, beating the more likely enemy of inflation.
“That’s good, because I honestly felt it came across differently.”
I have in my case my GMNA fund is 18% of my emergency fund and would not go over 20%. The rest, I have it it multiple CDs (a ladder from prior years, some I Bonds and 4% in Lending Club (yes LC)). In my case I have a year of expenses because I’m self employed, so I have somewhat increased requirements. My current blended rate is 5.18% The investments are safe, generating interest and have in quickly liquid form that I can take out 2 months without issue.
If I did what this post suggested I would be generating no interest on this real amount of savings.
Investor Junkie says
Let me also add:
“An emergency fund is there so that if you need the money tomorrow, you know exactly how much of it you have. If your car breaks down, or your house needs repairs, or you lose your job, you have a set amount of cash available to you.”
IMHO at least for me consider credit cards for that purpose. Use the credit card for the repair, then use your savings to pay the card off at the end of the month.