Can You Lose Your Money in a Money Market Account?

Many individuals prioritize both growth and security when considering where to place savings. A common question arises regarding the safety of funds held in money market accounts, particularly whether it is possible to experience a loss. This article clarifies the nature of money market accounts and the protections in place, addressing concerns about their security and value. It also differentiates between types of accounts that share similar names but carry distinct risk profiles.

Understanding Money Market Accounts

A money market account (MMA) is an interest-bearing deposit account offered by financial institutions, including banks and credit unions. These accounts blend characteristics of both traditional savings and checking accounts, providing a balance of earning potential and accessibility. While they typically offer higher interest rates than standard savings accounts, they often come with specific requirements.

MMAs often require a higher minimum balance to open or to avoid monthly fees. Many provide limited check-writing capabilities and debit card access, offering more flexibility for transactions than a regular savings account. However, these accounts usually impose monthly limits on certain types of withdrawals or transfers, typically around six per month.

Understanding Deposit Insurance

The security of funds in money market accounts is largely supported by federal deposit insurance. For accounts at banks, this protection is provided by the Federal Deposit Insurance Corporation (FDIC). Deposits at credit unions are insured by the National Credit Union Administration (NCUA). Both agencies offer a standard coverage limit of up to $250,000 per depositor, per insured institution, for each ownership category.

This insurance covers the principal and accrued interest, protecting depositors in the event of a bank or credit union failure. Ownership categories refer to how accounts are structured, such as individual, joint, and certain retirement accounts. For instance, a single account held by one person is insured up to $250,000. A joint account with two owners at the same institution can be insured for up to $500,000, as each co-owner’s share is covered up to the $250,000 limit.

Factors Affecting Account Value

While federal deposit insurance protects the nominal dollar amount in a money market account, economic factors can affect the money’s real purchasing power. Inflation is a primary concern, as it represents a general increase in prices over time, which reduces currency’s buying power. If the interest rate earned on a money market account does not keep pace with inflation, the real value of the funds diminishes.

For example, if an account earns 1% interest but inflation is 3%, the money’s real return is negative 2%, meaning it can purchase less. While the number of dollars in the account may grow due to interest, the actual quantity of goods and services those dollars can buy decreases. For most individuals, the primary concern regarding the erosion of value in a money market account stems from inflation rather than institutional failure. However, a scenario where deposits exceed federal insurance limits in a bank failure could theoretically result in a loss of uninsured funds.

Money Market Accounts Versus Money Market Funds

Money market accounts and money market funds have similar names but are distinct financial products with different risk profiles. A money market account (MMA) is a deposit product offered by banks and credit unions, insured by the FDIC or NCUA. These accounts are designed for savings and provide federal insurance, offering a high degree of safety for the principal.

In contrast, a money market fund (MMF) is an investment product, a type of mutual fund typically offered by brokerage firms. Money market funds invest in short-term debt securities and aim to maintain a stable net asset value (NAV) of $1 per share. Unlike money market accounts, money market funds are not federally insured. There is a rare possibility for a money market fund to “break the buck,” meaning its share price falls below $1, which would result in a loss of principal for investors.