5 Money Market Account Misconceptions (2024)

Money market accounts can keep your money safe and liquid. But they do have downsides to consider and they are often misunderstood and misused. But what are they? And how do you avoid some of the mistakes most people make when they invest in these low-interest-bearing vehicles?

Learn about the five biggest mistakes investors make with money market accounts.

Key Takeaways

  • Money market accounts similar to regular savings accounts.
  • Most money market accounts offer higher interest rates than traditional savings accounts.
  • Money market accounts are not money market funds, which are like mutual funds.
  • These accounts are also prone to inflationary risk, and should not be used as the prime source of investment.

What Are Money Market Accounts?

Money market accounts are deposit accounts held at banks and credit unions. Often referred to as money market deposit accounts (MMDA), they often come with features that make them distinct from other savings accounts. They are considered a great place to hold your money temporarily, especially when the market is raging with volatility and you can't be sure of any other safe haven.

When you hold a money market account, you can be certain your balance is insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000.

Many money market accounts come with check-writing ability and a debit card. Some banks limit the amount of transactions that can be done in an account, however. Before April 2020, the Fed limited this to six, but this limit was removed to help individuals during the Coronavirus pandemic. Banks are still allowed to impose their own limits.

These accounts are interest-bearing—generally single-digit returns—and may pay a little more than a traditional savings account. That's because they can invest in low-risk, stable funds like Treasury bonds (T-bonds) and typically pay higher rates of interest than asavings account. While the returns may not be not much, money market accounts are a good choice to consider during times of uncertainty.

5 Money Market Account Misconceptions (1)

Misconception #1: They Are Money Market Funds

Mistaking a money market account for a money market fund is common, but there are critical distinctions between the two financial instruments.

Amoney market fundis a mutual fund characterized by low-risk, low-return investments. These funds invest in very liquid assets such as cash and cash equivalent securities. They generally also invest in high credit rating debt-based securities that mature in the short term. Getting in and out of an MM fund is relatively easy, as there are no loads associated with the positions.

Often, though, investors will hear "money market" and assume their money is perfectly secure. But this does not hold true with money market funds. These types of accounts are still an investment product, and as such have no FDIC guarantee.

Money market fund returns depend on market interest rates. They may be classified into different types such as prime money funds which invest in floating-rate debt and commercial paper of non-Treasury assets, or Treasury funds which invest in standard U.S. Treasury-issued debt like bills, bonds, and notes.

Misconception #2: They Are a Safeguard Against Inflation

A common misconception is believing that placing money in a money market account safeguards you against inflation. But that's not necessarily true. Money market accounts are not designed to outpace inflation. Rather, it is simply to grow savings at a faster rate than traditional checking or savings accounts.

Let’s assume, for example, that inflation is lower than the 20-year historical average. Even in this situation, the interest rates banks pay on these accounts decrease as well, affecting the original intent of the account. So while money market accounts are safe investments, they really don't safeguard you from inflation.

Misconception #3: A Large Allocation Is Efficient

The changing rates of inflation can influence the efficacy of money market accounts. In short, having a high percentage of your capital in these accounts is inefficient.

Some money market accounts require minimum account balances for 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 as emergency funds. Beyond that, not investing will mean missing potential earnings.

Misconception #4: They Are the Best Option

In many instances, we are programmed to believe that saving money is ideal. But investing it well can get you greater returns. Staying in a cash position for too long instead of investing can result in the loss of potential gains. High-yield returns on your money generally require diverse investments.

Misconception #5: One Account Is Enough

Diversification is one of the fundamental laws of investing. Cash is no different. If you insist on holding all your money in money market accounts, no one account should hold more than the FDIC-insured amount of $250,000. It is not uncommon to see families or estates with multiple bank accounts insuring their money as much as possible.

Using this strategy, dividing the money up into three “buckets” can prove useful. Having money set aside for the short-term (one to three years), the mid-term (four to 10 years, and the long-term (10 years plus) can lead investors down a more logical approach to how long—and how much—money has to be saved. To take a more tactical approach, we can apply the same buckets and assess your tolerance for risk in a realistic way.

Consider putting long-term money into other low-risk investment vehicles like an annuity, life insurance policy, bonds, or Treasury bonds. There are countless options to divide your net worth to hedge the risk of losing the value of your money kept in cash.

These approaches can help to outpace current and future inflation while protecting money from losing its value. Understanding how different investment types works, including the risks and potential rewards, will allow you to make the right decision for your situation.

Frequently Asked Questions (FAQs)

What Is a Money Market Account?

A money market account is a deposit account offering higher interest than traditional checking or savings accounts. Money market accounts are offered by both banks and credit unions.

What Is the Downside of a Money Market Account?

The one possible downside of a money market account is that the institution may limit how many withdrawals you can make at a time, usually within a month or year, thus limiting access to your funds.

Is a Money Market Account Worth Having?

Whether or not a money market account is worth having will depend on the individual. But generally, yes, it is worth having. Money market accounts offer a low-risk environment with a higher interest rate to grow your money. Money market accounts are insured by the FDIC and can help individuals reach their short-term savings goals.

The Bottom Line

Money market accounts serve a singular purpose: To keep your money safe. Ultimately, you'll want to research all your options and perhaps consult with a financial advisor to determine how the best way to use your cash to meet your financial goals.

5 Money Market Account Misconceptions (2024)

FAQs

5 Money Market Account Misconceptions? ›

Money market accounts are considered safe, low-risk investments. They earn interest and allow for easy access to your money. Your balance is also FDIC-insured, so it's unlikely that you'll lose money. However, fees and interest rate changes could deplete your returns.

What are the problems with money market accounts? ›

While money market accounts are a great option for short-term savings, they have limitations that potential users should consider.
  • Depending on your bank, there could be withdrawal limits. ...
  • Many accounts have monthly fees. ...
  • Your account might have a minimum balance requirement.
Mar 15, 2023

What is a con of a money market account? ›

For example, you often won't earn as much with a money market account as you would with a traditional CD because the CD has a time commitment: The bank will pay you more in exchange for locking up your funds longer. Keep the possible trade-off of a lower yield in mind when you're thinking about opening an account.

What are the restrictions on a money market account? ›

Since they're a type of savings account, money market account holders can only make six transactions, including online transfers, debit purchases and bill payments every month or payment cycle per FDIC rules. This forces users to treat their MMA funds as true savings.

What are the limitations of the money market? ›

Limited Growth Potential: Money market investments may not provide significant opportunities for capital growth. These instruments primarily focus on capital preservation and short-term liquidity management, making them less suitable for investors seeking substantial growth or long-term wealth accumulation.

What is risk in a money market account? ›

There are few risks of money market accounts. The primary way a money market account could lose of money is if the account is charged fees, due to the account holder not adhering to the financial institution's rules and conditions of the account.

Is there a chance to lose money on a money market account? ›

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.

Can I withdraw all my money from a money market account? ›

Usually you can make unlimited withdrawals and payments by using an ATM or by making the withdrawal in person, by mail, or by telephone. A money market account might require a minimum amount to be deposited.

Is it safe to put all your money in a money market account? ›

Generally speaking, money market accounts are very safe. At banks, money market account balances are insured by the FDIC, and at credit unions, balances are insured by the NCUA. Both the FDIC and NCUA insure up to $250,000 per depositor, per account ownership category per insured institution.

Can your money get stuck in a money market account? ›

Your money is not bound for a predetermined duration. Instead, you can withdraw funds when needed, giving you control over your finances. So, your money is never really stuck. However, MMAs sometimes charge small penalties if your balance drops below a certain amount or you make more withdrawals than agreed.

What are the 5 disadvantages of money? ›

The following are the various disadvantages of money:
  • Demonetization - ...
  • Exchange Rate Instability - ...
  • Monetary Mismanagement - ...
  • Excess Issuance - ...
  • Restricted Acceptability (Limited Acceptance) - ...
  • Inconvenience of Small Denominators - ...
  • Troubling Balance of Payments - ...
  • Short Life -

What is the disadvantage of cash market? ›

Disadvantages of the Cash Market

Market Volatility: It is sensitive to price fluctuations and market volatility, which can result in significant losses or gains for investors. The prices of financial instruments can be influenced by various factors such as economic news, political events, and investor sentiment.

What are the 3 main limitations of a market economy? ›

The disadvantages of a market economy include monopolies, no government intervention, poor working conditions, and unemployment.

Can your money be stuck in a money market account? ›

Your money is not bound for a predetermined duration. Instead, you can withdraw funds when needed, giving you control over your finances. So, your money is never really stuck. However, MMAs sometimes charge small penalties if your balance drops below a certain amount or you make more withdrawals than agreed.

Is it good to keep money in a money market account? ›

Because you earn higher interest rates than with a traditional savings account, a money market account can be a great choice to set aside some emergency cash or start building your savings. And unlike a traditional savings account, you have more options for withdrawing your money when you want it.

Are money market accounts safe during recession? ›

Money market funds can protect your assets during a recession, but only as a temporary fix and not for long-term growth. In times of economic uncertainty, money market funds offer liquidity for cash reserves that can help you build your portfolio.

What is safer than a money market account? ›

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.

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