Money market accounts combine the benefits of both savings and checking accounts with the potential for higher interest yields. While the Federal Deposit Insurance Corporation or the National Credit Union Administration insures your money market account, bank fees and penalties can eat into your earnings. Here’s what you need to know about whether you can lose money in a money market account. Remember that a financial advisor can help you allocate your money to different asset classes, including money market accounts.
What Is a Money Market Account?
A money market account is a deposit account you can open at a financial institution like a bank, credit union or online brokerage. Money market accounts have many benefits, including interest rates typically higher than those on traditional savings and checking accounts. They are relatively safe because they are insured by institutions like the FDIC or NCUA. At the same time, they provide more liquidity than savings products like CDs.
Despite their many advantages, money market accounts can have higher minimum balance requirements than savings accounts. Interest rates on money market accounts can fluctuate depending on your account balance. Like savings account withdrawals, money market account withdrawals are usually limited to six per month.
Keep in mind that a money market account is different from a money market fund.
How Money Market Accounts Work
Money market accounts allow customers to deposit funds and earn interest on their money, much like a savings account. However, interest on these accounts is often higher than interest rates on traditional savings accounts. At the same time, you can access money in the account at any time, and some institutions might offer perks like check-writing privileges.
Interest on money market accounts often compounds daily but is paid once per month. For example, if your money market account has a $10,000 balance with a 3% APY, your monthly payment would be 3% of $10,000 divided by 12, or $25. Since interest compounds, each successive interest payment would be slightly higher, assuming no withdrawals.
While the money in these accounts is liquid, withdrawals are often limited to six per month, similar to savings accounts. In fact, this is to maintain their status as a deposit account and to avoid exorbitant transaction fees.
Funds in a money market account are often insured by the FDIC or NCUA. This generally insures you for up to $250,000 per account per depositor.
Risks of Money Market Accounts
While money market accounts are among the safest places to stash your money, they aren’t entirely risk-free. You can lose money in a money market account either directly or indirectly.
Fees are one of the ways you can lose money with a money market account. Some money market accounts assess certain charges, like monthly service fees and paper statement fees. If your account nickels and dimes you with excess charges, you may want to look for a money market account with lower monthly fees.
You could also lose money if the financial institution that holds your money market accounts were to default. This risk is generally low, especially if your account is insured by the FDIC or NCUA. In this case, anything up to $250,000 will be safe. Verify that your account is insured to minimize the implications of default.
An indirect way you can lose money with a money market account is due to inflation. While money market accounts might earn more interest than traditional savings accounts, their interest rates might be lower than the rate of inflation. In this scenario, your account balance may not decline, but your money’s purchasing power will erode over time. Other investments, like stocks, can have greater risk but have higher long-term returns.
How to Minimize Risk in a Money Market Account
You can minimize the risk of losing money by keeping an eye out for red flags. For example, if your money market account has high fees or is not insured by either the FDIC or NCUA, you could be at risk of losing money.
The best money market accounts generally avoid these risks. Plus, you can open them online. In most cases, opening a money market account should only take a few minutes. Some have no minimum deposit requirements with high APYs and no monthly fees.
The Bottom Line
Money market accounts allow customers to deposit money and earn monthly interest on their deposits. The money in these accounts usually earns more interest than a traditional savings account. However, the money is liquid, unlike money that’s held in a CD. But you can still lose money in some cases, like if your money market account has high fees. Funds in a money market account can also lose purchasing power due to inflation. One of the best money market accounts can help you avoid these risks.
Tips for Opening a Money Market Account
- A financial advisor can help you work through your banking needs and put together a plan that works for your unique situation. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- The best money market accounts pay some of the highest rates and often do away with costly fees. See SmartAsset’s list of the best money market accounts to find one that’s right for you.
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