Considering opening a money market account? Well, it’s not as easy as one might think.
There are plenty of pros, cons, and risks to consider before making a move, and your biggest question may be: can I lose my money in a money market account?
If you’re looking to put your mind at rest, you’ve come to the right place.
So let us walk you through everything you need to know about money market accounts and if they’re a safe place to keep your cash in.
What Is A Money Market Account?
Money market accounts (MMAs) are designed to provide investors with access to short-term interest rates.
They are considered safe because they are insured against losses from bank failures or other financial crises. MMAs are also known as cash management accounts.
Banks and credit unions offer money market accounts. These accounts allow you to borrow funds at low-interest rates and deposit them into your account.
The interest earned on these deposits is added to your balance.
While money market accounts are generally considered safe, some risks are associated with them.
If you decide to open one, make sure you read the fine print carefully before opening an account.
The Risks Of Money Market Accounts
The main risk of money market accounts is that the value of your investment could decrease due to market fluctuations.
This means that you could end up losing more than what you originally invested.
Another risk is that the value of the money market account will fluctuate based on the current state of the economy.
For example, during times when the economy is strong, interest rates tend to increase. As a result, the value of money market accounts tends to rise.
However, during economic downturns, interest rates often drop. When this happens, the value of money markets goes down.
Another risk associated with money market accounts is fees. Some money market accounts charge monthly maintenance fees while others charge annual fees.
Fees vary depending on the type of account you choose. Make sure you understand all fees associated with the account before signing up for one.
In essence, they are just like any other savings or checking account, and you have no guarantee of return on those investments.
In fact, the returns are usually lower than regular savings accounts.
Can I Lose Money?
To answer the question “can you lose your money in a money market account?” — the answer is yes. But, there are ways to protect yourself against losses.
One way is by investing in mutual funds. Invest in mutual fund offerings from companies such as Vanguard, Fidelity, TIAA-CREF, and Schwab.
You’ll be able to diversify your portfolio and reduce the risks associated with individual stock holdings.
Although money market accounts are federally insured, so you won’t lose your cash if the bank fails, you can still lose your money in other ways.
So, for example, if you withdraw too much money from the account, you could incur penalties or even get charged a penalty fee.
The Benefits Of Money Market Accounts
Good news: it’s not all doom and gloom! Let’s take a look at some benefits of opening a money market account.
1. Low-Interest Rates
One benefit of money market accounts is their ability to offer low-interest rates. Money market accounts typically pay less than 1% per year.
That’s much better than most savings accounts which pay between 0.5% and 2%.
2. Access To Short-Term Interest Rate
Another benefit of money market accounts is their ability to offer access to short-term rates.
Unlike traditional savings accounts, money market accounts can offer higher yields than long-term bonds.
3. Insured Accounts
If you want to be able to sleep well at night knowing that your money is protected, then you should consider opening a money market account instead of a regular savings account.
Money market accounts are federally insured, so you don’t need to worry about losing your money if the bank fails.
4. Safe Investments
Another reason why people opt for money market accounts is that they are considered safe investments.
Unlike stocks and bonds, money market accounts do not fluctuate in value. They are also FDIC insured.
5. No Minimum Balance Requirement
Money market accounts are not required to maintain minimum balances. This means that you don’t have to keep adding money to your account each month.
6. No Monthly Maintenance Fee
Some money market accounts require you to pay a monthly fee. These fees range from $0-$10 per month.
The good thing about these fees is that they are waived if you deposit over $100 into the account.
How To Open A Money Market Investment Account
To open a money market account, visit your local branch or go online. Once you complete the application process, you’ll receive a confirmation email.
This will include information regarding how to access your money.
Who Can Open A Money Market Account?
You can open a money market account for any type of business.
However, individuals who plan on using the money market account primarily for personal use may find it more beneficial to open an Individual Retirement Account (IRA).
You can open an IRA through a financial institution like TD Ameritrade, Charles Schwab, E*Trade, Merrill Lynch, etc.
Types Of Money Market Accounts
There are two types of money market accounts available: regular money market accounts and sweep accounts.
Regular Money Market Accounts
A regular money market account allows you to make deposits up to $250,000. It pays interest at a rate of 0.05% – 0.25%, depending on the amount of money deposited.
Sweep Accounts
A sweep account offers a lower interest rate of 0.01% – 0.08%. You can only make one withdrawal every 90 days with this type of account.
If you withdraw your funds before the 90-day period has passed, you will incur a penalty.
Final Thoughts
When it comes to money, there’s always a risk of loss.
Although it’s possible to lose cash in a money market account, thankfully, there are ways to protect yourself, and if done correctly, the risks are minimal.
In fact, we hope we’ve shown you that there are many advantages to opening a money market account, and doing so is easier than ever!
Financial Disclaimer
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