High-Yield Savings Accounts vs. Money Market Funds

Looking to make your money work a little harder for you, and you’re looking for the best high-yield savings accounts and money market funds as potential options? But which one is right for you? Let’s dive into the details of each to help you make an informed decision.

Understanding High-Yield Savings Accounts

High-yield savings accounts (HYSAs) are pretty much what they sound like – savings accounts that offer higher interest rates than traditional savings accounts. These accounts are typically offered by banks, both brick-and-mortar and online, and are FDIC-insured up to the applicable limits.

Some benefits of high-yield savings accounts include:

  • Safety – Since high-yield savings accounts are FDIC-insured, your money is protected up to $250,000 per depositor, per institution, in the event the bank fails. This level of protection gives you peace of mind knowing that your funds are secure.
  • Higher interest rates – As the name suggests, high-yield savings accounts offer better interest rates than standard savings accounts, allowing you to earn more on your savings. This means that over time, you’ll see more growth in your account balance, which can help you achieve your financial goals more quickly.
  • Liquidity – You can access your money relatively easily, making high-yield savings accounts a good option for emergency funds or short-term savings goals. This level of accessibility allows you to tap into your funds when you need them while still earning a higher interest rate than you would with a regular savings account.

HYSA Options

Now that you know the benefits of high-yield savings accounts, let’s take a look at some of the best high-yield savings accounts you can find today: 

  • Ally Bank – currently offering 3.75% on high-yield accounts. This online bank also has a user-friendly website and mobile app, making it easy to manage your account.
  • Marcus by Goldman Sachs – currently offering 3.9%. Marcus also provides a variety of other financial products, such as personal loans and CDs.
  • Discover Bank – currently offering 3.75% to customers seeking an HYSA. In addition to savings accounts, Discover Bank also offers checking accounts, CDs, and credit cards.
  • Capital One – currently offering 3.75%. Capital One also offers other financial products, including checking accounts, credit cards, and loans.

Exploring Money Market Funds

Money market funds, on the other hand, are a type of investment offered by banks and investment companies. They invest in short-term, high-quality debt securities like Treasury bills and commercial paper. Money market funds aim to maintain a stable net asset value (NAV) of $1 per share, but there’s no guarantee that they’ll always achieve this.

While some money market funds offered by banks might be FDIC-insured, those offered by investment companies typically are not. Instead, they are regulated by the Securities and Exchange Commission (SEC) and subject to certain restrictions to help minimize risk.

Advantages of money market funds include:

  • Potentially higher yields – Money market funds may offer higher yields than high-yield savings accounts, though this depends on the fund and the current interest rate environment. In some cases, the difference in yield can be significant, making money market funds a more attractive option for those seeking higher returns.
  • Liquidity – Like high-yield savings accounts, money market funds are relatively liquid, allowing you to access your funds when needed. Most money market funds allow you to withdraw your money without penalty, although some may have minimum withdrawal requirements or impose fees for excessive transactions.
  • Investment flexibility – Money market funds can be a useful cash management tool within an investment portfolio, offering a place to park cash between investments or to maintain a cash reserve. 

Money Market Fund Options

Just as with high-yield savings accounts, there are various money market fund options available for you to choose from. Keep in mind that investment performance, fees, and features can change over time, so be sure to conduct thorough research and compare current offerings.

  • Vanguard Prime Money Market Fund (VMMXX) – The Vanguard Prime Money Market Fund seeks to provide current income while maintaining liquidity and a stable $1 NAV. This fund invests primarily in high-quality, short-term money market instruments, including U.S. government securities and commercial paper.
  • Fidelity Government Cash Reserves (FDRXX) Fidelity Government Cash Reserves aims to provide preservation of capital, liquidity, and current income by investing in U.S. government securities and repurchase agreements. This fund maintains a stable $1 NAV and has a strong focus on safety.
  • Schwab Government Money Fund (SWGXX) – The Schwab Government Money Fund seeks to provide a stable $1 NAV, liquidity, and income by investing in U.S. government securities. This fund emphasizes the safety and preservation of capital and can be a solid option for conservative investors.
  • T. Rowe Price U.S. Government Money Market Fund (TGOXX) – The TGOXX fund invests in U.S. government securities and repurchase agreements with the objective of maintaining a stable $1 NAV and offering liquidity and income. T. Rowe Price is known for its research-driven approach to investing, making this a strong option for those seeking exposure to government securities.

Comparing the Two: Key Factors to Consider

Now that you’ve got a basic understanding of high-yield savings accounts and money market funds let’s compare the two based on some key factors:

1. Safety

High-yield savings accounts have the edge here, as they are FDIC-insured up to $250,000 per depositor, per institution. This means that if the bank holding your high-yield savings account were to fail, your funds would be protected. 

Money market funds, on the other hand, are not guaranteed, even though they are typically considered low-risk investments. Money market funds offered by banks may have FDIC insurance, but those offered by investment companies are regulated by the SEC and do not have this insurance. Keep in mind that while money market funds aim to maintain a stable net asset value (NAV) of $1 per share, there’s no absolute guarantee that they’ll always achieve this.

2. Returns

Both options can provide higher returns than traditional savings accounts, but the winner in this category can vary based on the interest rate environment and specific offerings. High-yield savings accounts offer interest rates that are generally higher than those of standard savings accounts. Money market funds, meanwhile, can potentially offer even higher yields, though this depends on the specific fund and the current economic climate. 

When deciding between the two, it’s essential to compare current rates and yields to determine which option might provide the better return on your investment. 

3. Fees

High-yield savings accounts typically don’t have fees (unless you don’t meet minimum balance requirements or exceed certain withdrawal limits). Money market funds, however, may have management fees, expense ratios, or other costs associated with them. 

When comparing your options, make sure to take these fees into account, as they can impact your overall returns.

4. Access to funds

Both high-yield savings accounts and money market funds offer relatively easy access to your money, but there may be some differences in withdrawal options, limits, or check-writing capabilities. 

In 2020, Regulation D, a rule that allowed banks to restrict the number of savings account transfers to six per month, was modified. Consequently, high-yield savings accounts now permit unlimited withdrawals. Although money market funds may have less stringent withdrawal constraints, they might impose fees or penalties for excessive withdrawals, depending on the specific fund. It is crucial to be aware of any limitations and possible charges before selecting an account.

best high-yield savings accounts

Making a Decision

So, which one is right for you? It really depends on your personal financial goals, risk tolerance, and preferences. If you prioritize safety and FDIC insurance, a high-yield savings account might be the better choice for you. On the other hand, if you’re seeking potentially higher returns and don’t mind the slightly increased risk, a money market fund could be a more suitable option.

Your financial situation and goals may change over time, so it’s a good idea to periodically reassess your choice and adjust your strategy accordingly. By staying informed about your options and considering your individual needs, you can make the best decision for your financial future.