Ask an Ex-Banker – HYSA vs. Money Market

Q. Why do I keep getting ads about high-yield savings accounts? Especially from AMEX. What is the benefit of a HYSA? Is a money market better than a high-yield savings account or should I be doing something else with my emergency fund while it sits there? 

–David N, San Antonio

Answer: Probably do nothing. 

I’ll take your 3 related questions one at a time. 

Why do you get ads? Because the company thinks it will profit if you do what they want you to do. That may be the beginning of an answer as to whether it will benefit you, or rather it will benefit the company paying to advertise to you.

The difference between a savings account and a money market account is that a savings account is guaranteed (currently up to $250 thousand dollars, by the FDIC) whereas a money market fund is a form of a brokerage account investing in short-term securities, and is not guaranteed to hold its value. It is guaranteed against theft by the brokerage in the form of investor protection laws similar to those that protect against stock, bond, or mutual fund theft.

Although money market funds are not guaranteed by the FDIC, during the 2008 crisis the federal government did prevent any monetary losses in money market funds. So there’s an implied guarantee against loss of value, but not an explicit one. 

The reason for your question is you wonder whether it makes sense to earn a higher yield or interest rate by switching from one type of account to another. If you have a normal-person sized emergency fund, let’s say $10,000, you should do nothing. The extra 3 percent or so you can earn by switching accounts will leave you $300 richer at the end of the year. And then your thought should be, like, basically, who cares? If you have a million dollars in a bank account then, yes, that’s worth $30,000 in interest and worth the hassle of switching. Incidentally, the recent failure of SVB and First Republics banks had its origins in people with multi-million dollar cash accounts switching their money to other places, and it’s likely that among the factors for switching were higher yields available elsewhere after the Fed hiked interest rates. That wasn’t the only factor, but it was probably one of them.

Finally, should you be doing something else with your emergency fund? No. The point of an emergency fund is to do nothing interesting, take no risks, earn very little, and let it just be there when there’s an emergency. Just be chill with your savings.

A version of this Q & A ran in the San Antonio Express News and The Houston Chronicle

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