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Money market accounts are considered safe, low-risk investments. They earn interest like a savings account, but most come with a debit card or checkbook as well. That allows for easier access to your money. The funds you put into a money market account at a bank are insured by the Federal Deposit Insurance Corp. (FDIC), so it's highly unlikely that you'll lose money—but fees and interest rate changes could eat into your expected returns.
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Can You Lose Money in a Money Market Account?
Thanks to FDIC insurance, it's next to impossible to lose money in a money market account as the result of a bank failure if you hold less than $250,000 (or $500,000 in a joint account). They also offer competitive annual percentage yields (APYs), so your money will grow faster than if you were to put that money in a traditional savings account. Rates vary depending on the financial institution. But these deposit accounts aren't entirely risk-free. Here are some things that could deplete your returns:
Fees
You may run into monthly maintenance fees or minimum balance requirements. If your balance drops below a certain amount, your interest rate may decrease. You can also expect limits on how many free electronic transfers and withdrawals you can make, typically six per month. Fees vary from one financial institution to the next, but it could be as much as $15 per withdrawal.
Interest Rate Changes
The federal funds rate, which is set by the Federal Reserve, usually influences APYs on deposit accounts. As the rate goes up and down, APYs on money market accounts, savings accounts and certificates of deposit (CDs) tend to move in the same direction. If yields drop, your money market account balance won't earn as much interest as it did before.
Lagging Returns
Money market accounts are not connected to the stock market. Your funds are shielded from market volatility, but returns tend to lag behind stocks. Over the last hundred years, the stock market has produced average annual returns of about 10%. Holding the bulk of your wealth in a money market account could cut you off from better returns. It underscores the importance of diversifying your investments.
Are Money Market Accounts FDIC-Insured?
Money market accounts held at banks are FDIC-insured for up to $250,000 per depositor, per insured bank. Most credit unions provide similar coverage. If your balance exceeds the coverage limit—and your financial institution fails, which is rare—you could lose those excess funds. One workaround is to split your funds between money market accounts at different banks. Having a joint owner on your account can also increase your coverage limit.
Alternatives to Money Market Accounts
- CDs: With a CD, you agree to keep your money in the account for a predetermined amount of time. You'll get your investment back, plus interest, when the account matures. You'll likely incur an early withdrawal penalty if you tap your funds before then. CDs aren't known for their liquidity, but they can be a good option if you don't need your money right away.
- Money market funds: It's important to note that money market accounts are different from money market funds, which are low-risk mutual funds. They usually focus on short-term investments like CDs and government debt. These might offer higher returns, but your funds may not be as readily available. They also carry more risk since they aren't insured.
- High-yield savings accounts: These earn higher APYs than traditional savings accounts. Money market accounts provide easier access to your funds, but that may not be a good thing if you have a habit of dipping into your savings. A high-yield savings account can be a good place for your emergency fund.
The Bottom Line
The chances of losing money in a money market account are very slim. These insured deposit accounts are considered safe investments. They also earn interest, allowing you to grow your money a little faster. While long-term gains usually aren't as robust as stock market returns, they can help diversify your portfolio and provide necessary liquidity.
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