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.
If you’d like more detail about money market accounts, I think that this article and this article are great resources.
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?
Subscribe here and follow me on Facebook, Twitter, Instagram and Pinterest so you never miss an update!
Anything You Want - A Personal Finance Blog 
I have an online savings account with a quasi-high interest rate. Unfortunately, even high interest accounts aren’t earning much these days!
LikeLike
It is frustrating that all interest rates are so low right now! I guess we benefit in the low interest rates for mortgages and other loans, though.
LikeLike
I would check out MagnifyMoney.com and Bankrate.com. I’ve seen interest rates at about 1.5% for some banks (money market accounts). Navy Federal Credit Union often has introductory offers of 3% for one year, so check them out specifically.
We have a six month e-fund, and we have 3 months in cash at Capital One 360(maybe 4-5 months if we exclude our childcare needs), and the other 3 months in an index fund. This feels like a good choice for us, especially because we always have a one month pad of cash plus sinking funds for our various less predictable expenses.
LikeLike
I’ll check those sites out – thanks! Sounds like you’ve got a good plan in place. The most important thing is figuring out what works best for you!
LikeLike
0.01%?? I’d rather keep my money in a safe in my basement!
I’ve been using Capital One 360 for a while and I like it (mostly because it’s out of sight out of mind) but I’m getting 0.75% on the money we have there. Not crushing it but it’s better than nothing!
LikeLike
Yeah, 0.01% is really bad! I’ll have to check out Capital One 360. 75% is not bad at all!
LikeLike
We have used an online savings account for the last ten years. While interest rates have been low for years, our online account has maintained better rates, and is secure, as you said. Thanks for covering the topic. I like that you have a form for reader questions.
LikeLike
Good to hear that you’ve used an online savings account for so long and are happy with it. I hope you’ll send in a question – I’d love to answer it!
LikeLike
We’ve had an account with Ally for years now, for our cash cushion, and find them easy to deal with. It’s easy to transfer money in and out, good account tracking features, etc. Of course, as others have noted, we’re still getting less than one percent. It’s worth asking oneself whether all your money needs to be risk-free — we like to keep our emergency fund and some additional cushion in savings, but invest all the rest. Because when you save in a “risk-free” savings account, you’re actually taking on inflation risk, which means that you risk your money not growing fast enough to keep up with inflation. And sure enough, inflation is higher than savings account interest rates right now, so by putting all your money there, you’re actually GUARANTEEING that you’re losing value, because your interest rate isn’t keeping pace with inflation. It’s just trading one risk (the risk of stock value loss) for another (inflation). Nothing is iron clad, so it’s often helpful to at least get the benefit of some investments that have the potential for more upside than the piddly 0.85% you’ll get on savings!
LikeLike
Thanks for the info on Ally – always good to hear about satisfied customers. Its a great point about inflation risk. I completely agree that it is important to have some investments that have a higher potential yield. I just worry about investing money that will be needed in 6 months or a year, during which time inflation risk is minimal but risk of losing money in the stock market is huge.
LikeLike
I remember when CDs paid 5%. I wonder if that makes me old. I just keep my emergency fund mostly in the Vanguard Prime Money Market account, and some of it (and I know this is a cardinal sin) in Vanguard’s Short-Term Bond Index. It pays a bit of interest (just over 1%) and has Vanguard’s risk rating of 1, so it fluctuates, but is pretty dependable.
LikeLike
Sounds like a good system! I also remember the days of CDs that actually had a decent return. Hopefully we’ll get back there some day!
LikeLike
Honestly the interest rates on savings accounts are so low right now it almost doesn’t matter whether you are getting 1% or 1.2% or even 0.5%. I would recommend people keep a decent amount in savings but there’s no reason to be excessive.
LikeLike
You’re right, the rates are so low that if you’re keeping small sums of money in savings it almost doesn’t matter what return you’re getting.
LikeLike
I am a fan of Capital One 360! I have targeted savings accounts with them and I love it.
LikeLike
I’ll have to check that out! I’ve never had targeted savings accounts, but I love the idea!
LikeLike
We also use CapitalOne 360 (formerly ING Direct) for the targeted savings accounts. They make it VERY easy (and free) to open a new account and transfer money into it. I have separate accounts for holding the security deposits for our rental properties, but the more important thing for the purposes of this blog post is that we have accounts for our next car purchase and for a future vacation, with money automatically transferred into them from our main checking account every 2 weeks (on payday). And if you open a CapitalOne 360 checking account, they’ll send you checks and a debit card. That’s free, too. No direct deposit or anything required.
LikeLike
Sounds like an awesome system! I’ve never had targeted savings accounts because my bank doesn’t offer them, but I really like the idea. I’ll have to check Capital One 360 out!
LikeLike
This is a really great piece! I do have an mm account, and I think it’s a good option.
LikeLike
Thanks!
LikeLike
With the poor interest rate environment I typically consider anything in savings as my liquid emergency fund. Once you have your emergency fund built up to an acceptable level, begin investing your additional savings in index funds and other investment vehicles to maximize your returns. I think if you look at your savings as something to get a return on you’ll find that there really isn’t any “safe” account with a return worthwhile.
LikeLike
Agreed! I have a similar system that only my liquid emergency fund is in savings accounts and the rest is invested.
LikeLike
Oh snap, I’m going to have to think of a good question for your “Ask Ali” series 🙂 I love that idea! These are great tips for someone like me who is seriously clueless about this stuff! I need to look into some of these options!!
LikeLike
Awesome – I would love that! Glad you like the post!
LikeLike
Great write up – I personally love my Ally accounts 🙂 I had a Discover student loan way back when so I have negative feelings towards them, even though they never technically did anything wrong 🙂
LikeLike
Haha I can completely understand the negative association there! Might be worth another try though, as long as they’re paying you interest and not charging it!
LikeLike
In Canada, I would suggest putting it in a TFSA savings account. TFSA = Tax-free savings account. You keep all the interest you earn, although these days this is not a huge amount on a savings account!
LikeLike
Sounds like a good deal! We have some tax free savings accounts in the US but they are usually for retirement.
LikeLike
Does the US have an equivalent to GICs in Canada? https://en.wikipedia.org/wiki/Guaranteed_Investment_Certificate
IF you do, I’d recommend that if you’re not breaking 1% on your other options.
LikeLike
Interesting. I’m not sure if the US has such an investment but it seems like a great option if you’re in Canada! I’ll have to look into that!
LikeLike