Can I Lose Money in a Money Market Account?
Explore the real risks and robust protections of money market accounts. Understand when and how your funds might be affected.
Money market accounts are a common financial tool, often considered a low-risk option for managing savings. These accounts typically offer higher interest rates than traditional savings accounts while maintaining accessibility. A common question arises regarding their safety: is it possible to lose money in a money market account?
Understanding Money Market Accounts
Money market accounts serve as a savings vehicle, balancing liquidity with competitive interest rates. They provide check-writing privileges and debit card access, similar to checking accounts, and accrue interest like savings accounts. Interest rates often fluctuate with market conditions.
Two distinct types exist: Money Market Deposit Accounts (MMDAs) and Money Market Mutual Funds (MMFs). MMDAs are offered by banks and credit unions as deposit products. Their interest rates are set by the financial institution and can be variable, often tiered based on the account balance.
MMFs are investment products offered by brokerage firms or investment companies. These funds invest in a portfolio of highly liquid, short-term debt instruments such as U.S. Treasury bills, commercial paper, and certificates of deposit. Both types aim for stability and liquidity, but their underlying structures and regulatory frameworks differ significantly.
How Money Can Be Lost
Money can be lost in money market accounts through several mechanisms. A direct loss of principal, known as “breaking the buck,” is a rare risk primarily associated with Money Market Mutual Funds. This occurs when the Net Asset Value (NAV) of an MMF falls below $1.00 per share. A prominent instance occurred in 2008 when the Reserve Primary Fund’s shares fell to 97 cents after losses from Lehman Brothers debt.
Fees can also erode money. Money Market Deposit Accounts and Money Market Mutual Funds may charge various fees, including monthly maintenance fees, transaction fees, or fees for falling below a minimum balance requirement. If the interest earned on the account is insufficient to cover these charges, the account balance can decrease. Some accounts may require a minimum daily balance, such as $1,000 or more, to avoid fees.
A subtle form of loss is the erosion of purchasing power due to inflation. Even if the nominal amount of money in a money market account remains stable or grows slightly, high inflation can reduce what that money can buy over time. For example, if an account earns 1% interest but inflation is 3%, the real value of the money decreases by 2% annually. This means that while the dollar amount in the account might not decrease, its real value and ability to purchase goods and services diminish, representing a genuine financial loss.
Protections and Safeguards
Protections mitigate risks associated with money market accounts. Money Market Deposit Accounts (MMDAs) offered by banks are insured by the Federal Deposit Insurance Corporation (FDIC). This insurance covers deposits up to $250,000 per depositor, per insured bank, for each account ownership category. Similarly, MMDAs held at credit unions are insured by the National Credit Union Administration (NCUA), providing coverage up to $250,000 per depositor, per institution, per ownership category. This federal insurance protects funds even if the financial institution fails.
Money Market Mutual Funds, while not FDIC or NCUA insured, are subject to regulation by the U.S. Securities and Exchange Commission (SEC). These regulations, primarily under the Investment Company Act of 1940, aim to enhance resilience and transparency. Recent amendments have increased liquidity requirements, mandating that funds hold a higher percentage of their assets in daily and weekly liquid assets (25% and 50%, respectively).
The SEC has also removed provisions that allowed MMFs to impose temporary redemption gates, aiming to reduce the risk of investor runs during stressed market conditions. While the possibility of an MMF “breaking the buck” exists, the regulatory framework, coupled with fund management practices and voluntary sponsor support, makes significant losses rare.