How High-Yield Money Market Accounts Work

Saving money takes dedication and patience, and if you're an avid saver, you probably know it can be all the more difficult when savings account interest rates are so low you hardly notice a change in your balance. But even with savings accounts, there are various options you can choose from, and you may be missing out on higher interest rates to help grow your savings.

Read on to know more about the advantages and disadvantages of high-yield savings accounts and money market accounts and how they differ.

What is a high-yield savings account?

High-yield savings accounts are just as they sound: savings accounts with much higher interest rates than traditional ones. The interest rate on high-yield savings accounts can be more than 10 times that of conventional savings accounts, which makes them a worthwhile option to consider if you're looking to maximize your savings. What's more, high-yield savings accounts can typically be connected to checking accounts, so you can easily transfer money between the two (although the interest rate and the minimum balance requirement can vary depending on the type of savings account). 

You may be wondering, what's the highest interest on a savings account? At the time of this writing, the high-yield savings account with the highest annual percentage yield (APY) is SmartyPig by Sallie Mae bank, with a 0.70% APY. To put that in context, the average APY for savings accounts typically ranges from 0.05% to 0.10%. According to the Federal Deposit Insurance Corporation, the current average rate for savings accounts is 0.06%.

What is a high-yield money market account, and how does it work? 

A money market account is similar to a savings account; you deposit money and earn interest. But they’re not to be confused with money market funds. A money market account is used for banking, while a money market fund invests your money.

Money market savings accounts usually have high-interest rates, but your daily balance should show noticeable changes. Even with a high-interest rate, savings still grow slower than an investment typically would.

High-yield money market accounts are similar to traditional bank accounts in many ways. Some allow you to write checks and use a debit card to withdraw cash from ATMs. Others charge monthly maintenance fees, especially if it has an above-average rate or if you choose to receive paper statements (while these days, many banks now allow you to access your account from a mobile app at no additional charge). And you can open a money market account at your bank or credit union, just as you would a savings account.

Another savings option similar to a money market account are certificates of deposit (CDs). With CDs, you also benefit from above-average rates, but they are only for a set term. Some are short-term and only last a month, while others last years. The catch? You can't withdraw your funds from a CD before the end of the term without paying a penalty fee. 

In comparison, a money market account is much easier for you to make withdrawals, which means your money is accessible when you want it. 

High-yield savings vs. money market account

Compared to conventional savings accounts, money market accounts tend to have a higher minimum opening deposit requirement and higher interest rates. 

The main difference between a high-yield savings account and a money market account is that the latter tends to be more liquid, with debit card options and check-writing privileges. 

The interest you earn on your deposits could be higher than a savings account, although some do require higher minimum balances to start. Many money market accounts have a low initial deposit, so you can still open a money market account even if you don't have a large sum to deposit off the bat.

The rate on a money market account is also tied to the Federal Reserve, specifically with the federal funds rate impacting the interest rate on MMAs. If the federal fund rate increases, the rate on a money market account will also increase.

How often do savings rates change?

The annual percentage yield (APY), which is the interest rate of your savings account compounded over a year, can change at any time. The policy of the Federal Reserve impacts your APY, specifically when the Federal Reserve adjusts the federal funds rate, many financial institutions will follow their lead. 

Although your rate could change at any time, there typically is a low amount of volatility, and your rate should not change day-to-day. The interest you earn on your account is relatively low, so you shouldn't notice significant changes in your daily account balance, even if the interest rate changes.

When the Federal Reserve raises the funds rate and interest rates rise, your APY could increase if you have a high-yield account. Depending on the economy, the Federal Reserve could lower or raise rates several times throughout the year or keep it fairly consistent.

Be it a traditional savings account or a money market account, the APY will fluctuate. Some banks or credit unions may offer fixed APYs for a certain period as an incentive for you to open an account, but no accounts have a permanently fixed rate.

MMA accounts will also have different compounding frequencies; some could compound interest daily, monthly, or quarterly. The more frequently an account compounds (ideally daily), the more your money will grow.

What are money market accounts used for?

There are several reasons why you might want to open a money market account. If you have a sum of money you'd like to earn interest on without any risk, an MMA can earn you a higher interest rate than a typical savings account. If you're saving for retirement, an MMA can be one way to have guaranteed access to cash later in life and earn a high-interest rate while you save.

Like other deposit accounts, money market accounts are also insured by the Federal Deposit Insurance Corporation. 

Unlike other funds, money market accounts do not take a part of your returns, although they can charge fees to account holders depending on the terms set forth when you open the account. 

How is money protected in a money market account?

Your money is FDIC-insured, as long as the bank you open an account through is an FDIC member. Your money is insured up to $250,000 through a money market account, one of the reasons MMAs are a popular choice for people.

If you open a money market account through a credit union rather than a bank, your account is still insured. The National Credit Union Administration facilitates insurance for deposit accounts like MMAs.

The bottom line

If you want to optimize your savings, you have various options depending on your goals. Money market savings accounts are popular because of the high annual percentage yield and their ability to withdraw easily through debit cards or checks.

Like anything, high-yield money market accounts have drawbacks; many money market accounts require higher balances than an average deposit account. You also may have to pay a fee for services because of the higher than average interest rates the account offers. 

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