Can You Lose Money on a Money Market Account?

A money market account (MMA) is an interest-bearing deposit account offered by banks and credit unions. These accounts provide a higher interest rate compared to a traditional savings account while allowing convenient access to funds. MMAs are designed to offer a balance between earning potential and liquidity, a flexible option for managing savings.

Understanding Money Market Accounts

Money market accounts function as a hybrid between savings and checking accounts. They earn interest, which is variable and fluctuates with market rates. MMAs often come with features like limited check-writing privileges or a debit card, making them more accessible than certificates of deposit (CDs) but less so than standard checking accounts. These accounts serve as a stable place for short-term savings or emergency funds, combining security with a modest return.

Scenarios for Principal Loss

While money market accounts are generally considered very safe, the purchasing power of your money, or in rare cases, the nominal principal, could be affected. Money market accounts offered by banks are insured by the Federal Deposit Insurance Corporation (FDIC). This insurance protects deposits up to $250,000 per depositor, per insured bank, for each account ownership category. The FDIC protects depositors’ funds in the unlikely event of a bank failure, meaning direct loss of principal due to a bank closing is extremely rare for insured amounts.

Even with FDIC insurance, inflation poses a different kind of risk. Inflation refers to the general increase in prices over time, which reduces the purchasing power of money. If the interest rate earned on a money market account is lower than the rate of inflation, the real value of the money in the account decreases. This erosion of purchasing power is a form of “losing money” in real terms, even if the dollar balance remains unchanged. Additionally, if broader interest rates in the economy rise, the variable rate of an MMA might not keep pace, representing an opportunity cost in terms of foregone higher earnings elsewhere, though this does not directly reduce the principal balance.

Money Market Accounts Versus Money Market Funds

The distinction between money market accounts and money market funds is important for understanding principal loss. Money market accounts are FDIC-insured deposit products offered by banks and credit unions, aiming to preserve the principal balance. They are distinct from money market funds, which are investment products.

Money market funds are mutual funds offered by brokerage firms or investment companies. They invest in short-term, high-quality debt securities, such as Treasury bills or commercial paper. A crucial difference is that money market funds are not FDIC-insured. They are investment products subject to market fluctuations, though they generally target a stable net asset value (NAV) of $1 per share.

A money market fund “breaks the buck” when its NAV falls below $1 per share, leading to a direct loss of principal for investors. While rare, this can happen if the fund’s investments suffer losses, or if there is an increase in redemption requests that the fund cannot meet without selling assets at a loss. A notable instance occurred in 2008 following the Lehman Brothers bankruptcy, where the Reserve Primary Fund’s value dropped to 97 cents per share. Understanding this distinction is important, as confusing these two products can expose individuals to unexpected principal loss in money market funds, which is not typically a risk for FDIC-insured money market accounts.