A low rate of return means that the investment will not only grow less, but it will also be more vulnerable to inflationary forces. If the rate of return on your money market account is less than the rate of inflation, your buying power will go down. Check out these money market account disadvantages to enhance your knowledge. Read more about benefits of money market subject to expand your perspectives.
Money market securities are these short-term debt products that are very easy to buy and sell. Commercial paper and repurchase agreements (also called “repos”) are two types of short-term debt contracts. Commercial paper is a term for short-term, uninsured loans given out by businesses that need money. Most people just call repurchase deals “repos.”
Money Market Account Disadvantages
If you have a money market account at a bank that is part of either the National Credit Union Administration or the Federal Deposit Insurance Corporation, up to $250,000 of your assets are guaranteed to be safe. This type of account is not the same as a money market mutual fund because money market mutual funds are not protected. Money market accounts mix the good things about savings accounts and checking accounts by giving higher interest rates and making it harder to write checks. Another name for a money market account is a hybrid account. Even though there are many good things about money market accounts, there are also a few big problems with them. You can use the money market account disadvantages list below for research and educational purposes.
Inflation &Taxes
Interest income from savings, credit, and money market accounts is taxed at a rate that is set by the federal government. If the interest rate is less than the rate of inflation, your ability to buy things will go down. Don Taylor, a writer for Bankrate.com, says that it is often a good idea to put some of your money in a certificate of deposit (CD) with a higher interest rate, even if there is a penalty for taking it out early.
Financial Danger
Some money market funds have “broken the buck,” which means that the price of their shares has dropped below $1. This is unusual for assets that are so safe, but it has happened to some money market funds. Even though the general risk is low, money market funds are not insured by the FDIC like savings accounts and CDs are. Because of this, the risk of money market funds is just a little bit higher than that of other similar investments.
Payment Limit Alert
One of the biggest problems with having a money market account is that it makes it harder to pay your bills every month. Bankrate.com says that you can use a debit card, a check, or both to pay for up to three electronic payments per month. Most of the time, there is no cap on how many withdrawals you can make in person, by mail, or at an ATM. On the other hand, you need a checking account if you have a lot of monthly costs that keep coming up.
Customer Coverage Verify
In addition to banks and credit unions, there are more and more financial institutions that offer money market accounts. This shows how popular these options are becoming. Credit Karma and T-Mobile are just two places where you can save money. Even though these other options might have higher APYs or other perks, moving your money to one of them could cause you to lose FDIC or NCUA insurance.
Also, this doesn’t apply to all bank accounts, such as those that work like money market accounts. Before you make a deposit, you should carefully read through the terms and conditions to make sure your money will be safe. This is the money market account disadvantages.
Fees
You should know everything there is to know about any fees that come with your bank account. Some banks can charge monthly upkeep fees for money market accounts. This is allowed by law. Some banks will not charge you at all if you meet certain requirements, like keeping a minimum daily amount or getting direct deposits. Not all financial companies are like this, though. When the monthly fee goes up, the amount of interest you earn on your savings will go down.
Explore Better Rates
Even if you can get better interest rates on other savings products with bigger limits, the best money market accounts still give you a chance to make a good amount of money.
Due to its higher minimum deposit and longer maturity time, a certificate of deposit (CD) usually gives a higher return on investment than a money market account. If you can keep your money in the bank for a long time, you will get a better rate of compensation. For example, if you put your money in a certificate of deposit (CD) for two years, you could make up to 3% per year. If you want to open a new account, you should know that the return rate will go down.
Low Initial Deposit
Different banks have different minimum starting deposits for money market savings accounts. At some banks, the minimum starting deposit is just one dollar, while at others, it can be as much as $5,000 or $10,000. Most of these places have high minimum amounts, so if you’re just starting to save money, it’s possible that you won’t be able to open a money market account at a number of banks.
Flexible Interest
There is a chance that the interest rate on your money market account will be set up in stages. Banks require a $10,000 minimum for optimal interest rates, ensuring a balance that aligns with their profitability and risk models. Money market account interest rates fluctuate and aren’t fixed, subject to change based on market conditions without a set duration. Bank may reduce your rate if overall market interest rates decrease, impacting your account’s earnings. Money market accounts don’t offer rate protection like certificates of deposit (CDs), which pay a set rate until they mature.
Money market accounts vary in interest rates; while some compete, others might not surpass a traditional savings account’s annual percentage yield. For a higher interest rate, aim for at least $5,000, but it could go up to $10,000 in some cases. Two options may make a money market account less appealing if you aim to maximize your financial returns.
Restricted Withdrawal
Withdrawing from a money market account is like a regular bank; the process remains familiar and straightforward. Under old Regulation D, these accounts allowed only six withdrawals per month. Government eases money market withdrawals due to COVID-19, providing temporary flexibility amid the outbreak’s economic impact. But some financial institutions may still set their own limits on how much you can take out. Also, they may charge a fee for payments that are more than a certain amount. This is another money market account disadvantages.
Threat of Inflation
There is a chance of inflation with money market funds. Because of inflation, the money of tomorrow will be worth less than the money of today. Money market funds are especially vulnerable to the fear of inflation because their yields are not very high. Your purchasing power will decline if inflation is 3%.
Slow Wealth Erosion
In 2019, inflation in the United States was 2.3% per year. Food and various goods rose in price, while energy costs declined, contributing to the overall increase in prices. If you want your savings to grow over time, you shouldn’t put them in a money market account. At the U.S. average APY, your savings account would decrease by 2.2% annually. Few banks were ready to give interest rates that were higher than the average annual rate of inflation.
Taxable Gains
Money market interest is counted as income for the current tax year. Your bank will send you receipts with information about how much it cost you to get access to these funds. Tax burden depends on taxable income and deductions claimed, shaping your overall tax liability for the year. Fees may erase annual gains, risking investor’s profits from these funds in a money market account. Neglecting interest taxes invites fines and fees, despite the modest interest amount, leading to potential financial consequences.
Changing Rates
The amount of interest on a money market account can go up or down over time. It will change based on how the average interest rate on the market changes. Returns appear stable, but institutions impose fees for maintenance and transactions, affecting the overall stability of your investment.
Rule-Breaking Risks
Breaking rules, intentional or accidental, may result in losing a year’s interest. If withdrawals dip below the minimum, your account shifts to a standard savings account until you meet the minimum balance. Immediate when it comes to certain kinds of groups.
FAQ
When it Comes to Money Market Accounts, what is the Average Interest Rate?
A “respectable” interest rate on a money market account is one that is better than the market average. The usual annual percentage yields are near 0.20 percent right now. There is some room for discussion between different financial institutions when it comes to interest rates. Interest rates of 0.50 percent per year are available at some banks.
A Money Market Account Allows Withdrawals at any Time
The money in a money market account can always be taken out whenever it’s needed. But there may be a limit on the number of withdrawals that can make in a given statement cycle. Most of the time, each extra withdrawal will cost you a fee.
Should One Open a Money Market Account?
They let you invest in safe, low-risk securities like Treasury bonds, which are often called “T-bonds,” and they pay more interest than savings accounts. Even though money market accounts have low rates of return, they are still a good choice when the economy is uncertain.
Conclusion
Because the interest rates are low, they are about the same as or lower than what you would get from a regular savings account. This is the reason why. It’s possible that getting your balance to the bare minimum needed to decide that the change isn’t worth it won’t be enough. In this guide, we’ve explained money market account disadvantages. I hope that provided you with some useful knowledge.