Savings account or money market fund?

If you’re saving for a wedding, a down payment on a car or the December holidays, you might have considered stashing your cash under your mattress or simply keeping it in your primary banking account until you need it.

But before you start hiding R100 notes in a shoebox, consider using a savings account or a money market fund to save towards your short-term goals. Here’s the difference between the two.

Savings account

A savings account allows you to deposit money and earn interest on it. The interest rate on a typical savings account might be lower than the returns quoted by an investment account, but when you’re saving for a short-term goal, it’s generally better to put your money somewhere safe and stable, where it’s not exposed to the fluctuations of the market. A savings account also suits this purpose because it gives you easy access to the funds.

All banks offer savings accounts and there are dozens to choose from. Here are three examples: African Bank currently offers a pretty good interest rate of up to 6.5% in their savings pocket; TymeBank offers products that earn interest at a rate that grows over time, starting from 4%; and Capitec offers nominal interest rates starting at 2.25%. Most banks allow you to compare their products on their website, so do some online shopping before you choose an account.

Money market fund

A money market fund is similar to a savings account, with one key difference: there’s usually a minimum balance required. In other words, you need to deposit a certain amount of cash to gain access to the fund.

What does the “money market” part mean? It means that the fund has greater exposure to the market, and therefore usually offers better returns than a savings account does. For example, Standard Bank’s MoneyMarket Select account offers an interest rate of 4% with a minimum balance of R100,000. In comparison, their PureSave Account offers 2.5% interest with no minimum deposit required. There are other money market funds that require a smaller deposit. Allan Gray’s Money Market Fund, for example, requires starter capital of only R20,000. Do some shopping around to find the fund that suits you best.

It might be exposed to the market, but a money market fund is still a conservative investment choice, with interest rates that aren’t as high as fixed or notice deposit accounts. This is because you can still withdraw your cash whenever you like. Generally speaking, the more restricted the account, the higher the interest rates you can earn. Those interest rates also depend on the balance in your money market fund.

Which is better?

When you’re saving towards a short-term goal, it depends on how much cash you have for a deposit. If you have a decent amount to put down, go for a money market account. You can still access your moola at short notice, and you’ll get a fair interest rate. If you don’t have money to deposit, don’t disregard a savings account — it might not grow as fast as a money market account, but you’ll get better returns than leaving your money in your cheque account, and it’s far safer than hiding cash in that shoebox.

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