Money market accounts act as a hybrid between a checking account and a savings account, offering higher interest rates and flexible access to your funds — albeit with some limitations.
It's technically possible to lose money in a market account, but not in the same way you can lose money in an investment account. Depending on the terms of your money market account, you could lose value to fees and inflation.
If you're considering putting your money in a money market account for short-term savings goals, here's what you should know.
What is a money market account?
A money market account is a type of deposit account that you can use for short-term savings. Like a checking account, a money market account typically allows you to access your funds through a linked debit card, paper checks, or an ATM card.
At the same time, money market accounts often provide higher interest rates than traditional savings accounts, although they also usually come with the same monthly withdrawal limits. If you withdraw money more than six times in a month, you may incur a fee with each additional withdrawal.
Money market accounts may have steep deposit requirements and even charge a monthly fee, though you may be able to get the charge waived if you maintain a minimum balance. Your interest rate may be flat regardless of your balance, or you may be offered tiered rates based on your balance.
Can you lose money in a money market account?
Unlike an investment account subject to risk, you won't lose money in a money market account due to investment losses. However, there are other ways your account balance can decrease over time or lose value in the long run:
You can lose money to fees: If your account charges a monthly fee that you can't get waived, or you end up dealing with other fees, such as excessive withdrawal penalties, your account balance could drop if the fees exceed the interest you earn in the account.
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.
Your money will lose spending power over time: Even when money market account interest rates are high, they're still typically not high enough to outpace the prevailing inflation rate. That's why these and other types of savings accounts are best used for short-term financial needs and goals rather than long-term objectives.
While you can't necessarily avoid the prospect of your balance losing value due to inflation, you can avoid potential fees by shopping around and comparing rates and fees across multiple financial institutions.
In particular, look for money market accounts that don't charge monthly maintenance fees or that make it easy for you to get the fee waived each month.
If you're considering using a money market account for your regular banking, consider opening a checking account and a money market account or high-yield savings account instead so you don't lose money to excessive withdrawal fees.
Is a money market account FDIC insured?
If you open a money market account with a bank, it's very likely that your funds will be insured by the Federal Deposit Insurance Corporation (FDIC). The same is also true if you open the account with a credit union, but coverage for those institutions comes from the National Credit Union Administration (NCUA).
Covered accounts include:
The FDIC and NCUA offer insurance protection to consumers in the event that a bank or credit union fails. If that happens, your balance is protected up to $250,000 per financial institution, per person, per ownership category.
For the vast majority of Americans, that's plenty of coverage. But if you have more than $250,000 that you want to place in a money market account, consider spreading your funds across accounts with multiple banks or credit unions to ensure that all of your money is protected.
Alternatives to money market accounts
While a money market account can be a great place to stash some cash for short-term needs, high deposit and balance requirements and monthly fees may leave you looking for alternatives. Here are a few other options you may want to consider:
High-yield savings accounts: A high-yield savings account can offer interest rates that rival even the best money market account rates. In most cases, these accounts also don't charge monthly service fees.
CDs: Interest rates on both money market and high-yield savings accounts are variable, meaning they'll fluctuate over time. If you want to lock in a fixed interest rate on your funds and can leave the money alone for a set period, a CD could be a good fit. CD terms can range from just a few months to several years and can offer the highest rates for any savings account. That said, if you withdraw your money before your account matures, you may incur a penalty.
Low-risk investments: If you want to keep your money relatively safe but aren't saving for a specific goal, you may consider investing in low-risk securities, such as money market mutual funds and bond funds. While these options present a higher risk of losing your money, they can also potentially generate higher returns.
As you consider your current financial needs and goals, take your time to research all of your options to determine which one is the best fit for you.