With interest rates rising alongside rate hikes by the Federal Reserve since early 2022, investors can now earn decent returns on savings accounts and other short-term investments. High-yield savings accounts and money market funds are two options investors should consider, but there are some key differences to be aware of between the two. Here's what you need to know.
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High-yield savings accounts are savings accounts generally available through online banks that offer higher rates of interest than traditional bank savings accounts. The national average savings account pays a 0.25 interest rate as of June 2023, according to a recent Bankrate survey, while the best high-yield savings accounts come with interest rates above 4 percent.
High-yield savings accounts function similarly to traditional savings accounts and may limit the number of withdrawals you can make in a month. They're also FDIC-insured, which means you're covered up to $250,000 per account holder if your bank fails.
Money market funds are short-term investments offered by banks, brokers and mutual fund companies that invest in short-term securities such as certificates of deposit, U.S. Treasury bills and commercial paper. Money market funds aim to maintain a share price of $1. There have only been a few instances where a fund fell below that level, or "broke the buck," but the funds are not guaranteed.
Yields offered by money market funds depend on the current interest rate environment and tend to respond quickly to Fed policy. Money market funds can be a nice way to earn a return on your short-term savings, but aren't likely to build significant wealth over time.
Be sure to pay attention to a money market fund's expense ratio, which is the fee charged by the fund. This comes out of the return you earn as an investor, so it's better to have low fees, all else being equal.
Many investors confuse money market funds with money market accounts. Money market accounts are products offered by banks or credit unions as a savings tool and come with FDIC insurance, whereas money market funds are not FDIC-insured.
High-yield savings accounts and money market funds both present solid choices when it comes to investing your savings. Here's what to know about each:
High-yield savings accounts and money market funds are good ways to earn a decent return on your cash and short-term savings. The key difference between the two is that high-yield savings accounts are FDIC-insured, while money market funds are not. However, money market funds are considered very low-risk investments and may even have higher interest rates than high-yield savings accounts.
Check out Bankrate's list of the best money market funds before deciding which to choose.