Can money market accounts lose value?
There is no direct way to lose money in a money market account. However, it is possible to lose money indirectly. For example, if the interest rate you receive on your account balance can no longer keep up with any penalty fees you may be assessed, the value of the account can fall below the initial deposit.
Indirectly losing money, however, is a downside of money market accounts. Indirect loss can occur if the interest rates tied to the account fall, thus diminishing the initial return value of your account.
Like other deposit accounts, money market accounts are insured by the FDIC or NCUA, up to $250,000 held by the same owner or owners. Money market accounts tend to pay you higher interest rates than other types of savings accounts.
How much should a money market investor be concerned with that risk? Smith: Since their introduction in 1971, money market funds have broken the buck just two times. The first was in 1994, when a fund was liquidated at 96 cents per share because of large losses in derivatives.
However, this only happens very rarely, but because money market funds are not FDIC-insured, meaning that money market funds can lose money.
How safe are money market funds? There is little risk associated with money market funds. The U.S. Securities and Exchange Commission (SEC) mandates that only the highest-credit-rated securities are available in money market funds.
A money market account can be a low-risk way to grow your money, especially if you open an account with a competitive rate. The money in your account remains liquid — or easily accessible — making it ideal for short-term savings goals.
Money market accounts offer flexibility with check-writing and debit cards, savings accounts are more accessible and have lower fees, and CDs offer higher interest rates but with a commitment to keep your money locked away for a set period of time.
Money Market Funds
Ultra-conservative investors and unsophisticated investors often stash their cash in money market funds. While these funds provide a high degree of safety, they should only be used for short-term investment. There's no need to avoid equity funds when the economy is slowing.
Some money market accounts come with minimum account balances to be able to earn the higher rate of interest. Six to 12 months of living expenses are typically recommended for the amount of money that should be kept in cash in these types of accounts for unforeseen emergencies and life events.
Why are banks pushing money market accounts?
The Federal Reserve has hiked interest rates this year, pushing money market accounts to offer interest rates that are actually higher than the top savings account rates right now.
| Account | National average money market account | Sallie Mae Money Market |
|---|---|---|
| Deposit amount | $10,000 | $10,000 |
| APY | 0.68% APY | 4.65% APY |
| Earnings after six months | $33.94 | $229.86 |
| Earnings after 1 year | $68 | $465 |
Your interest rate can decline: Banks and credit unions set interest rates based on a variety of economic factors. If you open a money market account when rates are high but steadily decline, the value you thought you would get would decrease along with the rates.
On Sept. 16, 2008, the Reserve Primary Fund broke the buck when its net asset value (NAV) fell below $1 per share. It was one of the first times in the history of investing that a retail money market fund had failed to maintain a $1 per share NAV. The implications sent shockwaves through the industry.
- Interest rate risk. Interest rate risk measures the impact of changes in rates on the securities held by money market funds. ...
- Liquidity risk. Liquidity risk can result from market volatility or from a lack of liquidity in underlying securities held by a fund. ...
- Credit risk.
Since money market accounts are insured by the FDIC or the NCUA, you cannot lose the money you contribute to the account—even in the event of a bank failure. You can, however, be subject to fees and penalties that reduce your earnings.
Key takeaways
Money market accounts are a type of deposit account that earns interest. Rates are often higher than traditional savings accounts. Money market accounts typically limit your withdrawals per month and have a higher minimum balance requirement than traditional savings accounts.
There's no risk of you losing your deposit with a money market account. While money market accounts are considered low-risk accounts, that doesn't mean there aren't small risks to be aware of. The biggest risk a money market account poses is that your money may lose value over time to inflation.
While money market funds aren't ideal for long-term investing due to their low returns and lack of capital appreciation, they offer a stable, secure investment option for individuals looking to invest for the short term.
- Your Money Could Earn More Elsewhere. High-risk investments could provide better returns in the long run. ...
- Your Funds Are Uninsured. If you open a CD or a checking, savings or money market account from a bank, your funds are FDIC-insured. ...
- You Can Expect Fees.
Should I worry about money market funds?
Money market funds invest in short-term debt securities. As a result, money market funds can be a good option for investors looking for a low-risk investment that offers relatively easy access to their money.
Money market accounts and savings accounts are equally safe places for consumers to keep their savings. However, it's important to open accounts at banks that are covered by FDIC insurance. You can check if your bank is FDIC-insured here.
Aim for building the fund to three months of expenses, then splitting your savings between a savings account and investments until you have six to eight months' worth tucked away. After that, your savings should go into retirement and other goals—investing in something that earns more than a bank account.
Fees and APYs. Typically, a brick-and-mortar (or traditional) bank's money market account has higher monthly service fees but offers a better interest rate compared to its savings account.
CDs and money market accounts are equally safe. They are both insured accounts and will not lose value.
