Can You Lose Money in a Money Market Account?

Money market accounts combine the benefits of both savings and checking accounts with the potential for higher interest yields. But can you lose money in a money market account? While the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA) insure money market accounts, bank fees and penalties can eat into earnings. Here’s what you need to know about how to protect the money in your money market account.

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. It has many benefits, including an interest rate that’s typically higher than those on traditional savings and checking accounts.

Money market accounts are also relatively safe, because they’re insured by institutions like the FDIC or NCUA. At the same time, they provide more liquidity than savings accounts like certificates of deposits (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. While a money market fund is an investment vehicle, a money market account is a type of deposit account and works differently.

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

A woman reviews a statement from her money market account.

While money market accounts are among the safest places to stash your money, they aren’t entirely without risk. 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 bank fees.

You could also lose money if the financial institution holding 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 types of investments, like stocks, can have greater risk but have higher long-term returns.

When Should You Use a Money Market Account

A money market account may be worth it if you want to earn more interest than a regular savings account while still maintaining access to your money. It works well for short-term savings goals, like building an emergency fund or setting aside money for a large purchase in the next year or two. You’ll earn interest and still be able to withdraw funds when needed, although some accounts may limit the number of withdrawals each month.

This type of account is also useful if you want a safe place to hold cash but don’t want to lock it up in a certificate of deposit (CD). Unlike a CD, a money market account lets you take money out without paying a penalty. It’s insured by the FDIC or NCUA, so your money is protected up to $250,000 per account per bank. This makes it a secure place for savings you may need in an emergency.

However, a money market account may not be the best choice if you need frequent access to your money or want higher long-term returns. If you plan to make a lot of transactions or need your funds regularly, a checking account or high-yield savings account might work better. For long-term growth, investments like stocks or mutual funds could offer more potential, although they come with more risk.

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 money market accounts 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.

Bottom Line

A man checking his money market account statement.

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. You can still lose money in a money market account in some cases; high bank fees are one example. Funds in a money market account can also lose purchasing power due to inflation. To counter these risks, consider opening one of the best money market accounts to hold and grow your funds.

A financial advisor can help structure your accounts to maximize your earnings and match your long-term financial strategy.

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. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel 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.