We may earn commissions if you use the recommended services on this site.  

Distinguishing Money Market Funds from High-Yield Savings Accounts: 4 Key Differences

Latest Business News

Understanding the Differences: Money Market Funds vs. High-Yield Savings Accounts

When it comes to choosing between a money market fund and a high-yield savings account, consumers may find themselves contemplating the key differences. While both options serve as safe repositories for emergency funds or short-term savings, there are important distinctions to consider.

Bank Accounts vs. Mutual Fund Investments

High-yield savings accounts are bank accounts typically offered by online institutions. These accounts are backed by the Federal Deposit Insurance Corporation (FDIC), providing insurance coverage for deposits up to $250,000 per account. On the other hand, money market funds are mutual fund investments offered by brokers and asset managers. These funds hold safe, short-term securities such as U.S. Treasury bonds or high-grade corporate debt.

Risk and Protection

While both money market funds and high-yield savings accounts are generally safe, money market funds carry slightly more risk. Unlike bank accounts, money market funds do not have FDIC insurance. However, they do have Securities Investor Protection Corporation (SIPC) protection, which insures against the loss of cash and securities up to $500,000 if an investor's brokerage fails. It's important to note that SIPC protection does not cover investment loss.

Interest Rates and Tax Considerations

Money market funds tend to offer slightly higher interest rates compared to high-yield savings accounts. Currently, the top-yielding money funds pay around 5.4% to 5.5%, while high-yield savings accounts offer rates up to 5.25%. It's essential for consumers to consider the net yield after taxes, as interest income from money funds holding U.S. Treasury bonds may receive tax benefits on state and local taxes, but not federal taxes.

Minimum Deposit Requirements and Fees

High-yield savings accounts generally do not have minimum deposit requirements, or if they do, the amount is relatively small. Money market funds, on the other hand, often require a minimum investment exceeding $1,000. Consumers should be cautious about allowing their balance to fall below a certain level, as it may incur fees. In conclusion, understanding the differences between money market funds and high-yield savings accounts is crucial when deciding where to invest savings. Considerations such as risk, protection, interest rates, tax implications, minimum deposit requirements, and fees play significant roles in making an informed decision. Evaluating individual financial goals and risk tolerance will help determine which option aligns best with personal circumstances.

Conclusion: Implications for New Businesses

The choice between money market funds and high-yield savings accounts can have significant implications for new businesses.

Investment and Liquidity

New businesses often need to maintain a balance of investment and liquidity. While money market funds may offer slightly higher interest rates, they also carry more risk and higher minimum investment requirements. High-yield savings accounts, on the other hand, provide more flexibility and security, which can be crucial for new businesses managing cash flow and unexpected expenses.
Risk Management
Understanding the different levels of risk between these two options is crucial for new businesses. While both options are generally safe, the lack of FDIC insurance for money market funds introduces an additional level of risk that businesses need to consider.
Tax Considerations
Finally, tax considerations can impact a business's bottom line. Money market funds that hold U.S. Treasury bonds may offer tax benefits on state and local taxes, which could be advantageous for businesses operating in high-tax states. In conclusion, the decision between money market funds and high-yield savings accounts can significantly impact a new business's financial strategy. By understanding the key differences and considering their own financial needs and risk tolerance, businesses can make an informed choice that supports their growth and success.
Story First Published at: https://www.cnbc.com/2023/09/06/money-market-funds-vs-high-yield-savings-accounts-4-key-differences.html
Brought to you by BusinessFormation.io
Know Your State's Registered Agent Requirements: What is a Registered Agent
Learn How To Create An LLC: What Is An LLC and How To Start an LLC Online

LLC Filing & Registered Agent Services

Compare Online LLC Filing Services Today

We work with the market leaders in business formation and registered agent services.

Getting started is simple and inexpensive. Form your business today & secure your brand name before someone beats you to it! Click below to view the Top 3 Best LLC and registered agent service providers.
View Top 3 Providers Now

Filing An LLC Can Be Complicated

Streamline Your LLC Filing Online for $39

Northwest Registered Agent is the best-rated service for first time filers.

Get professional LLC formation & registered agent services for only $39 + state filing fee. This offers includes your full LLC setup, plus a private business address, lifetime support, and more.

Trusted by Millions. Save 82% Today.