Can Money Market Accounts Lose Money?

Read our Advertiser Disclosure.
Contributor, Benzinga
December 13, 2022

A money market account is an account that offers interest like a savings account, but typically with higher interest rates. These accounts often have higher minimum balance requirements and may offer limited check-writing capabilities. 

Money market accounts are Federal Deposit Insurance Corporation (FDIC)-insured (up to $250,000) and are considered a low-risk savings option

But the question is, can a money market account lose money?

This article dives into whether investors can incur losses with this low-risk asset class. 

Can Money Market Accounts Lose Money?

A money market account could possibly lose value, but it is not a common occurrence. Although considered a safe investment like Certificate of Deposits (CDs), Treasury bills and other types of cash investments, remote possibilities exist in which you could lose money with a money market investment. 

Let's dive in. 

How Do Money Market Accounts Lose Money?

Money market accounts are considered low-risk investment products. These accounts are typically backed by the FDIC, which insures the accounts up to $250,000.

But in some instances, you could lose some of your money because of the following reasons:

Investment risk: Money market accounts typically invest in low-risk securities such as government bonds and short-term corporate debt. While these investments are considered safe, some level of minimal risk is involved. For example, if the issuer of the bonds or debt in which the money market account is invested defaults on their payments, the value of the money market account could decline. 

Money market funds: Money market funds are pooled funds that invest in low-risk securities, managed by an asset manager. Though money market accounts are FDIC-insured, money market funds are not.

Overdraft by owner: Money market accounts can lose money if the account holder withdraws more than the maximum amount of funds allowed in a given month, resulting in a penalty fee.

Below minimum balance: Similarly, withdrawing more than the set minimum deposit amount will attract penalty fees. Money market accounts have higher interest rates than regular savings accounts, and the providing institution would want to cover the costs that come with these higher rates.

Inflation: Money market accounts are subject to inflation risk, which means that the purchasing power of the money in the account could decrease over time if inflation outpaces the interest earned on the account.

Fees: An increase in the fees charged on the money market account would reduce your balance.

How to Keep Cash in Your Money Market Account

Here are some tips for keeping cash in your money market account.

Make regular deposits: To keep your account balance growing, make regular deposits into your money market account. You can do this through automatic transfers from your checking account or by manually depositing money into the account.

Avoid withdrawing more than you deposit: If you withdraw more money than you deposit, you may be charged fees.

Keep your account balance above the minimum: Most money market accounts have minimum balance requirements. To avoid fees and maintain access to your account, make sure that your account balance stays above the minimum required amount.

Shop around for the best interest rates: Money market accounts with higher interest rates will help your account balance grow faster. Compare rates from different financial institutions to find the best one for your needs.

Set up automatic transfers: To ensure that you are making regular contributions to your money market account, you can set up automatic, recurring transfers from your checking account. This can make it easier to maintain a consistent balance and grow your savings.

Frequently Asked Questions

Q

What is the downside of a money market account?

A

One potential downside of a money market account is that it typically has lower interest rates than other types of investments, such as stocks or mutual funds. As a result, your money will grow more slowly in a money market account than it would in other types of investments. 

Q

How much money should you keep in a money market account?

A

The amount of cash you allocate to a money market account will depend on your financial situation and goals. In general, keeping enough money in a money market account is recommended to cover your short-term cash needs, such as emergency expenses or upcoming bills. 

Q

Are money market accounts at risk?

A

Money market accounts are generally considered to be a safe investment because they are FDIC-insured, which means that the funds in the account are backed by the full faith and credit of the United States government up to $250,000 per individual. 

About Anna Yen

Anna Yen, CFA is an investment writer with over two decades of professional finance and writing experience in roles within JPMorgan and UBS derivatives, asset management, crypto, and Family Money Map. She specializes in writing about investment topics ranging from traditional asset classes and derivatives to alternatives like cryptocurrency and real estate. Her work has been published on sites like Quicken and the crypto exchange Bybit.