Safety. It’s a relative term.
Is New York City safe? Depends who you’re talking to. You can apply the same thinking to money market accounts.
If you’re an experienced or aggressive investor looking for a place to park idle cash, you might not think twice about risk in money market accounts. If you’re on the financially conservative side, though, you might worry about the safety and security of money market accounts. Or, maybe you decided to use a money market account because you consider it safe.
For several reasons, money market accounts (MMAs) are about as safe as it gets when it comes to parking or saving cash. You can keep short- and long-term savings with money market accounts and get many good nights of sleep in the process.
What are money market accounts?
Offered by banks and credit unions, money market accounts are deposit accounts that work similarly to checking and savings accounts. While they have some of the same features as these more common accounts, such as check-writing, debit cards and ATM access, they sometimes come with limitations.
For example, money market accounts might limit the number of transactions you can make in a month or carry relatively high minimum balance requirements. As with some checking and savings accounts, they might link your balance to how much interest you receive or the fees you pay.
Throughout this guide, we’ll refer to money market accounts, which can also be known as money market savings accounts, money market deposit accounts or money market demand accounts.
Safety measures for money market accounts
First and foremost, money market accounts are typically safe because they’re insured by the federal government.
If you open a money market account at a federally insured bank, the Federal Deposit Insurance Corp. (FDIC) insures up to $250,000 of your cash per bank, per depositor. You can use the FDIC’s BankFind tool to make sure a bank is insured.
It’s a similar story with credit unions. As long as your credit union is insured by the National Credit Union Administration (NCUA), you’re protected with the same terms as the FDIC. Use the NCUA’s Credit Union Locator to check if a credit union is insured.
This means if a bank or credit union fails, these government organizations ensure that you don’t lose money — principal and interest accrued — up to the stated limits.
The FDIC responds to bank failures. A bank failure refers to a federal or state regulatory agency shuttering a bank because it can no longer satisfy its obligations to depositors.
When a bank fails, the FDIC typically does two things:
- It makes good on bank deposits, paying depositors, dollar-for-dollar, to the insurance limit.
- It functions as the “receiver” of a failed bank, dealing with its assets and paying its debts, which can include claims on deposits above the insurance limit.
Sometimes when a bank fails, the FDIC will cut a deal with a private bank, as it did when First Republic Bank went under in early 2023. After California regulators closed First Republic Bank, they appointed the FDIC as receiver. Promptly thereafter, the FDIC signed an agreement with JPMorgan Chase, which took over First Republic Bank’s operations and assets, including deposit accounts (which includes money market accounts). The process works similarly with credit unions. While the NCUA guarantees the insured portions of deposits, it can take two other routes, both of which do not disrupt this insurance protection.
The NCUA can place a credit union into a conservatorship if there’s concern over the credit union’s stability. The NCUA assumes operations of the credit union — sometimes in conjunction with a state body — and nothing changes for depositors. They still can perform banking functions and have access to their cash alongside, of course, NCUA protection.
A conservatorship ends when the struggling credit union gets back on its feet and resumes operations, merges with another credit union or the NCUA liquidates the credit union.
A liquidation works similarly to the FDIC process with banks described previously, with the NCUA paying out insurance on deposits, when and if necessary, but seeking deals with other credit unions.
As of Oct. 9, the NCUA reports three conservatorships and two liquidations (both involuntary) in 2023.
Money market accounts versus money market funds
To best distinguish between money market accounts and money market funds, remember that a money market account is a deposit account whereas a money market fund is an investment. In fact, the full name of the latter is money market mutual fund.
A money market mutual fund is a comparatively low-risk mutual fund that invests in short-term securities, usually offered by the government and municipalities. While money market funds sometimes pay competitive interest rates (yields), often in line with money market accounts and high-yield savings accounts, they don’t receive FDIC insurance. This doesn’t mean your money is necessarily at risk in a money market mutual fund. It just means it doesn’t have the government protection that’s guaranteed when you open a money market account.
Are money market accounts right for you?
To determine if a money market account is right for you, consider your overall financial situation in conjunction with your short- and long-term goals and day-to-day personal finances.
If you’re writing numerous checks or making a lot of transfers each month, a money market account might not make sense. The Federal Reserve Board used to limit money market accounts to six withdrawals or transfers per month under Regulation D and while that restriction was suspended in 2020, many financial institutions still adhere to those limits.
A standard checking account is the better option to manage bill-paying and income allocation.
However, if you have excess cash you’re looking to save in an emergency fund or for a near-term purpose, a money market account can make perfect sense, particularly because of the quick access you have to your money. This is different from a certificate of deposit (CD), which typically requires you to keep your money locked up for several months to years or pay early withdrawal penalties.
This isn’t to say you can’t use a money market account for long-term savings. You can create a funnel between money market accounts and retirement planning.
For example, if you’re on the more financially conservative side, you might not want all of your retirement savings in the stock market or other investments. But you still want to earn better-than-average interest. A money market account can provide a happy medium between more risky investing activities, deposit accounts that pay relatively low interest and the underside of your mattress.
Optimizing money market account earnings
When looking for a money market account, you want one that pays a competitive interest rate. If you plan on keeping your savings in a money market account for the long term, try not to touch it. This will help you reap the benefits of compound interest.
As an example, if you deposit $5,000 in a money market account that pays 4% interest and compounds quarterly, you will have earned $203.02 in interest after year one. Keep this up for just five years, and the power of compounding turns your original $5,000 of savings into a $6,100.95 nest egg.
Pros and cons of money market accounts
As we have established, you can score handsome interest rates with money market accounts, which in the present environment are sometimes in excess of 5%. They also offer quick access to your funds via ATMs, debit cards to make purchases and check-writing capabilities.
On the flip side, potential limits on transactions and potentially lower interest rate than a CD (As of October 2023, the average money market interest rate is 0.65% and the average 12-month CD interest rate if 1.79%) could make money market accounts a less-than-optimal choice, depending on your situation.
Frequently asked questions (FAQs)
Technically, a money market account isn’t an investment option. It is a deposit account — like a checking or savings account — that pays interest and comes with FDIC or NCUA insurance protection as long as your financial institution is federally-insured. The interest-bearing feature works much like some investment products in that it generates income on your initial principal. However, it does this without the risk of losing that principal, something that isn’t a feature of most investment options.
A money market account operates just like a traditional checking or savings account. While the parameters around specific features and fees might vary, the process of opening an account, depositing money and accessing that money typically mirrors the experience you have likely had with your checking or savings accounts.
No, not directly, thanks to the aforementioned and described FDIC and NCUA insurance. That said, if you incur fees that exceed your money market account balance, your account could decline or go negative, resulting in a loss.
They’re close, but not quite as secure, particularly because the federal government does not insure the cash investors keep in money market funds. This doesn’t make them unsafe; it just makes them different in terms of how they function.
