Savings account VS money market funds: Which one should you choose?
You have probably accumulated a bit of savings and are wondering where to keep that money. Find out which type of account is right for you.
One of the surest ways to financial freedom is prioritizing saving. Whether to protect yourself against financial emergencies, eliminate financial stress and anxiety, avoid debt, build better money habits or a nice nest for retirement, the goal is to have readily accessible money.
But the question is, where do you put your savings? There are several ways to safely set aside money and earn interest on it. Two of the most popular options that earn interest are savings accounts and money market funds.
What are they?
A savings account is a basic bank account that allows you to deposit money, but with limited transactions, and earn an interest.
Here is why the bank gives you an interest on your savings.
“Because you are not allowed to take money out as frequently, like with a current account, the bank gets to hold on to your cash longer and use it to make money hence why they are able to compensate you with an interest rate,” says Mr Isaac Kamau, an Investment Manager at Madison Investment Managers Limited.
On the other hand, a money market fund is a type of mutual fund where money from many people is pooled together and invested in high quality short-term securities. Because of the large amounts of money collected, banks or investment companies can negotiate for better rates on deposits than an individual can on their own.
“If you walk into a bank with your KSh. 10, 000 and ask for a savings account, they may just give you a three per cent interest rate, for example. But for money market funds, because they have KSh. 10,000 from 1,000 people they can get a better rate. So basically, money markets have a higher interest rate than savings accounts,” he says.
For instance, with a KCB saving accounts, you can earn up to five per cent every year while most money market funds earn 8-10 per cent annually.
What are their similarities?
Both savings account and money market funds earn you a return on money deposited, however, money market funds earn a better.
Opening either of the two types of accounts is relatively easy especially because most banks/financial institutions offer online banking.
The two accounts also allow you to save as much as you want and make as many deposits as you would like each month.
How are they different?
One of the primary differences between these two types of accounts is the duration you’ll need to access the funds.
For savings accounts, it’s as easy as walking to your bank or using online banking. However, money market funds usually require a short notice of between one to four working days to withdraw the money.
Saving accounts often require low to minimum opening balances, and some like Co-operative Bank’s Hekima Savings account don’t require a minimum opening balance.
At the same time, money market funds tend to require higher initial deposit amounts to open an account. For instance, the CIC money market fund needs a minimum investment amount of KSh5, 000.
So, which of the two types of accounts should one choose?
According to Mr Kamau, it all comes down to an individual’s preference and whether they are keen on receiving the highest yields from their savings.
“I think it really depends on the individual. Money market funds earn a higher interest rate than savings accounts, but there is a small convenience. For money market funds, you can still withdraw your money, just not as quick as with a savings account. So, if it’s money that you’ll need for an extreme emergency a savings account may be better. But, if you are okay waiting for a day or two to withdraw money from the account, then the money market fund is better. With that being said, fund managers are now making it much quicker to withdraw from a money market account,” says the investment manager.
One of the benefits of a money market fund, Mr Kamau says, is the fact that it can be diversified across many banks. However, a savings account is only held within one bank.
“Overall, for most investors, the money market fund is generally a better option because it gives significantly higher yields than a savings account. Additionally, your money is not concentrated in one entity, which is a benefit on the risk side. But, money market funds, because of the fact that they lend directly to companies, carry some additional risk. Still, because you’re earning a much higher yield, you’re better off in the money market fund over time,” he says.