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Is a money market account considered cash in the bank like a savings account?

February 15, 2017

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Q: Is a money market account considered cash in the bank like a savings account?

A: Yes, money market accounts have a great deal in common with savings accounts. As you say, they are considered cash equivalents in that entire balance of your account is available on demand at any time. That balance includes any interest earned to date.

Money market accounts also have fairly similar interest rates to savings accounts. The most recent MoneyRates.com America's Best Rates survey found that the average money market account these days pays 0.195 percent. The average savings account rate pays just a few basis points more, at 0.227 percent. In each case, MoneyRates.com found that the most attractive accounts paid rates in the neighborhood of 1 percent.

The sections below will look a little more in depth at how you might use a money market account, and when you might want to consider different vehicles.

Money market accounts vs. savings accounts: What is a money market account for?

Savings and money market accounts are ideal for situations where you need immediate access to your money. That includes both for planned expenditures and simply to have an "emergency fund," which is a reserve you can draw on when unexpected needs arise.

How to earn higher bank rates

Savings and money market accounts are also useful for accumulating savings from paycheck to paycheck. You may ultimately want to transfer this money into longer term investments. But as an initial step getting the money out of your checking account and into a money market account should allow you to earn a higher rate of interest and make you less likely to spend rather than save that money.

Certificate of deposit: Another option to grow your money

In some cases, you might consider a certificate of deposit (CD) as an alternative to a money market account. The advantage is that CD rates are typically higher than money market rates. The disadvantage is that CDs lock your money up for a specified term with a penalty for early withdrawal. However, if you think it unlikely that you will need your entire balance all at once, you may choose to put a portion of your savings into a CD.

Limitations of money market accounts

Like savings accounts, money market accounts typically put a limit on how frequently you can draw on the money over the course of a month, so they are not suited for heavy transaction volumes the way a checking account would be.

Other investment options for retirement savings

Also, because of their relatively low interest rates, money market accounts are not well suited for long-term retirement savings. Those low rates mean that they will provide little growth to build your savings over time. In fact, money market rates are currently running below the rate of inflation, so you would lose rather than gain purchasing power over the long run. Investment vehicles with some growth potential, like online stock funds, are more suited to this type of long-term saving.

If you decide a money market account is appropriate for your needs, just remember that rates offered on these accounts vary widely, so be sure to shop around to get the best bank rate available.

Got a financial question about savings, banking, or investing? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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