Can You Lose Money in a Money Market Account?

Money market accounts are a common financial product for individuals seeking a balance between earning interest and maintaining access to their funds. They are generally viewed as secure, suitable for short-term savings or emergency funds.

Understanding Money Market Accounts

A money market account (MMA) is a deposit account offered by banks and credit unions, blending features of both savings and checking accounts. They offer higher interest rates than traditional savings accounts, making them attractive for growing liquid assets. MMAs often require higher minimum balances to open or maintain. These accounts allow for limited check-writing privileges and debit card access, providing more flexibility than a standard savings account. Institutions backing MMAs primarily invest in short-term, low-risk instruments like U.S. Treasury bills, certificates of deposit, and high-quality commercial paper.

Factors Affecting Principal Stability

While money market accounts are designed for stability, certain rare circumstances or external factors can affect the value of funds. The concept of “breaking the buck” primarily applies to money market funds, an investment product distinct from money market accounts. This occurs when the net asset value (NAV) of a money market fund falls below its $1.00 per share. Historically, this has happened due to investment losses, such as a fund holding distressed assets or experiencing significant liquidity issues during periods of financial stress. For instance, during the 2008 financial crisis, certain money market funds holding debt from a failing institution saw their NAV drop below $1.00, resulting in investor losses. Inflation can also diminish the purchasing power of money held in any account over time. If the interest rate earned on an MMA does not keep pace with inflation, the real value of the funds can decrease, even if the nominal principal remains stable. Account fees, such as monthly maintenance charges or excessive transaction fees, can erode returns and, in some cases, reduce the principal balance if earnings do not cover them.

Protections and Safeguards

Regulatory oversight plays a significant role in maintaining the stability of money market products. The Securities and Exchange Commission (SEC) regulates money market funds, imposing rules designed to ensure liquidity and diversification of investments. Recent amendments, for example, have increased daily and weekly liquid asset requirements for money market funds, aiming to bolster their ability to meet redemptions during market stress. While money market funds are not federally insured, they employ conservative investment strategies and maintain high liquidity to preserve capital. Fund management practices, combined with regulatory requirements, work to minimize the risk of a fund’s share price falling below $1.00.

Distinguishing Money Market Accounts from Money Market Funds

A common point of confusion exists between money market accounts (MMAs) and money market funds (MMFs), as they are distinct financial products with different levels of principal safety. Money market accounts are deposit accounts provided by banks and credit unions. These accounts are federally insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA), guaranteeing the principal up to $250,000. They function as savings vehicles. In contrast, money market funds are mutual funds, offered by brokerage firms or investment companies. These funds invest in short-term debt securities and aim to maintain a stable $1.00 net asset value per share. Money market funds are not insured by the FDIC or NCUA. The rare possibility of “breaking the buck” exists, meaning their share value could fall below $1.00. Investors in money market funds receive returns based on the underlying investments, minus management expenses.