Today I have another great reader question for you. Remember, if you have any questions you can send them to me using the Ask Ali form. I’d love to hear from you!
Here’s the question: I have money set aside in a “rainy day” fund. That money is not earmarked for any future down payment on a house, a new car, or vacations, etc. It’s just going to sit there in case I ever need it someday. Where should I put that money? Right now I have it all in an index fund. It makes me a little nervous in case there is a stock market crash. I really don’t want to lose that safety net I’ve created. However, if I were to put it all in a safe savings account it won’t make any interest and thus effectively lose value over the years. Thoughts?
This is a great question, and one I myself struggle with. How do you reconcile safety and getting a decent return? Traditional savings accounts are currently offering abysmal returns (I have a Bank of America account, which currently offers 0.01% interest – ouch!). The stock market has been seeing good returns, but we all know how risky the stock market can be, especially if you’re unsure about your investment time horizon. CDs are an option, but the current APYs aren’t great and it feels risky to tie your money up for any length of time.
This brings me to two good options for savings: money market accounts and online savings accounts. Please note that all interest rates are current as of this writing, but interest rates change fast so make sure to check current rates.
What is a money market account?
For consumer purposes, a money market account is essentially a savings account. The primary difference is that banks are allowed to invest the money contained in a money market account more widely than money in a savings account, and for this reason money market accounts often offer a higher interest rate. Like savings accounts, they are FDIC insured (up to the maximum allowed by law, currently $250,000). They do have some restrictions, such a limiting the number of transactions that can be made per month. They can also impose certain fees (although of course some savings accounts do too).
Be careful not to confuse a money market account with a money market mutual fund. A money market mutual fund, like all mutual funds, is not FDIC insured. This means that it can gain value, but it can also lose value. If you’re looking for a secure investment, a mutual fund is probably not the way to go.
What is an online savings account?
An online savings account is just what it sounds like: a savings account at an online bank. Unlike savings accounts at brick and mortar banks, which currently offer next to nothing in interest, online banks offer much more substantial interest rates (this article offers some compelling reasons why this might be so). Like savings accounts at brick and mortar banks, savings accounts at online banks are FDIC insured, making them extremely safe.
If they’re both safe, how do I choose between a money market account and an online savings account?
When I first read this question, my gut told me that a money market account would be the right answer. But as I dug in more, I learned that, in many ways, online savings accounts are very similar to money market accounts. Depending on the institution you bank with, either account type may have a minimum balance, monthly maintenance fees or other types of fees. The differentiator seems to be interest rates, and surprisingly online savings accounts seem to offer a higher interest rate! Neither I nor the interwebs can offer much of a reason for this. One feature that may account for the difference in interest rates between the two account types is that money market accounts seem to function more like a checking account, with access to ATMs, checks and online bill pay, whereas savings accounts typically don’t offer these features. But that is just my guess.
Which banks offer the best options for money market and online savings accounts?
I did quite a bit of research into which banks are currently offering the best rates. There are a lot of banks out there, some of which I’m not entirely sure I trust. I did find two good options, both of which I personally would feel comfortable keeping my money with.
- I’m a longtime Discover credit card holder, and I’ve always been pleased with their service. They have recently been expanding their banking services, and they currently offer both a money market account and online savings account with very competitive rates (0.75% and 0.95% APY, respectively) and no monthly fees. This chart gives an overview of the specifics of each option.
- Ally Bank. I do not have personal experience with Ally, but they seem to be a reputable banking institution and they certainly offer competitive products. Their money market account currently offers 0.85% APY and their online savings account offers 0.99% APY. Like Discover, Ally also does not charge monthly fees. This chart provides an overview of the specifics of each option.
Where would I put my own money?
Given this analysis and my own personal experience with Discover, I would be most likely to put my money in an online savings account at Discover. I am attracted to the higher interest rate offered by the savings account as compared to the money market account. The savings account limitations – such as no ATM access or checks – don’t bother me given the way I would use this account. Despite the slightly lower interest rate offered by Discover as compared to Ally, I know and like Discover and feel very comfortable putting my money in their hands.
What do you think? Do you have a money market account or online savings account? What is your favorite low-risk savings vehicle?