Is Money Safe in a Bank? Key Information for Savings Account, Money Market

  • Savings accounts and money market accounts are both insured by the Federal Deposit Insurance Corporation by up to $250,000, while money market mutual funds are not insured and are subject to higher levels of risk.
  • These accounts offer different levels of liquidity and interest rate, with money market accounts offering higher rates and easier access to funds.

The collapse of Silicon Valley Bank has sparked panic among depositors across the nation after a textbook bank run pushed SVB to implode last week in the second-biggest bank failure in United States history.

Depositors rushed to withdraw their money after the bank informed clients it had to sell part of its bond holdings to make good on the withdrawals that customers made by the Federal Reserve's aggressive interest hikes. As more and more people withdrew their funds in mass hysteria, SVB stocks plummeted, forcing regulators to take control.

Fears continue to escalate as national rating agencies express concern over the outlook of the entire U.S. banking system and American depositors have now been left questioning whether their money is safe in a bank.

Savings Account Money Market
A woman walks past a Citibank branch in Washington, D.C., on March 14, 2023. The collapse of Silicon Valley Bank has sparked panic among Americans. Andrew Caballero-Reynolds/AFP

Data from the Federal Reserve's Survey of Consumer Finances shows that 98 percent of U.S. households have either a savings account or a money market account (MMA). But what's the difference, and which offers higher levels of protection from federal agencies?

Here's a breakdown of the difference between a savings account, an MMA and a money market mutual fund:

Savings accounts

Savings accounts, which can be opened at a local bank or credit union, give individuals a place to put money that they don't plan to touch for a while. They are also suited for short-term expenses due to their high liquidity.

These accounts come with more limited options, like a set number of monthly transfers or withdrawals or a small rate of interest, and account holders don't have as much freedom or flexibility when it comes to accessing their savings.

These accounts are insured by the Federal Deposit Insurance Corporation (FDIC) at up to $250,000 per depositor, per insured bank, for each account ownership. There is no need to purchase deposit insurance, as opening an account would automatically cover the account holder.

For example, if you held a savings account with a bank or institution that collapses, like SVB or Signature, your combined investments will be covered by up to $250,000. So, these accounts are relatively safe despite being subject to liquid investments.

Money Market Accounts

MMAs are a type of savings account offered by banks and credit unions, that, unlike traditional savings accounts, offer a higher interest rate and easier access to funds. Some see this as a savings-checking hybrid.

With an MMA, a depositor is able to access their money through checks or a debit card, neither of which are offered by traditional savings accounts. These accounts also often require a higher initial deposit or for account holders to maintain a higher monthly balance.

Banks can use the money in these accounts to invest in stable, short-term, low-risk securities, but the higher interest rates offered by MMAs make them an attractive option for those wanting to save money for bigger expenses.

MMAs are also insured by up to $250,000 per depositor by the FDIC.

Money Market Mutual Funds

Money market mutual funds are often confused with MMAs but entirely different. While an MMA is a type of deposit account you open with a ban or credit union, a money market fund is an investment.

It is a type of mutual fund that allows investors to buy and sell fund shares or units within a shared portfolio, and thus earn money left over from transactions.

Unlike an MMA, where an account holder could write a check or make a withdrawal to access their money, money market fund investors would need to put in a request to redeem those shares, which are required to be paid out within seven days.

The key difference is that these funds are not insured against loss by the FDIC, making them riskier than an MMA even though the funds often make low-risk investments. These funds tend to offer the highest returns.

Money market funds are also carefully regulated by the U.S. Securities and Exchange Commission (SEC), which, in the wake of the 2008 financial crisis, developed a series of measures to make these funds more resilient.