Is it possible to lose your money in a money market account?
Investment opportunities are available in a variety of formats for people looking to grow their returns and reach their financial goals. One type of investment opportunity that may have struck your interest is a money market account.
However, with there being so many types of investment opportunities, you might be wondering if a money market account is safe or if you should go with another option.
Do not confuse money market accounts for money market funds
A money market fund is a mutual fund that invests in short-term securities, such as US Treasury bills. The goal of this investment is to stabilize high-value assets while providing a return on investment (ROI) for investors in the form of dividends which vary. Historically, money market funds have been a safe investment choice, but because they are not insured, they are vulnerable to losing value.
In the stock market crash of 2008, one market market fund – with assets of over $60 billion – saw its r Net Asset Value (NAV) fall under $1 per share to 97 cents per share. Other money market funds were similarly pressured, which resulted in investors pulling their money out of these funds out of fear of losing their savings .The combined impact of investors fleeing these “safe” havens sent ripple effects throughout the financial world that contributed to the stock market crash.
A money market account is similar in name to a money market fund, but that is about all they have in common. Money market accounts are essentially savings accounts which often pay a higher interest rate than a regular savings account and that can be withdrawn from easily. A money market account is FDIC-insured for up to $250,000 dollars. This means that if the institution operating the account goes out of business, your funds up to that amount will still be safe.
You could be missing out on potential earnings when using a money market account
Money market accounts are generally good for an emergency and opportunity fund and a short term place to park money. However, there are many limits to using a money market account as a means for long-term investment. For starters, money market accounts are totally liquid and thus, pay a lower return over time than many other investments. Further, the interest is reduced by federal income taxes. Other investment options, such as a 401(k) retirement account, are granted certain tax benefits that help your investment go further.
Another limitation to money market accounts is that they are subject to a volatile interest rate. The bank or institution operating the account may need to reduce the rate depending on the market. Instead, if you do not plan on using the fund for an extended period of time, you can invest in a Certificate of Deposit (CD). A CD generally will pay a higher interest rate than a money market account which is a guaranteed fixed interest rate once the end of your CD terms is met. Generally, there is a penalty for early withdrawal from a CD.
Furthermore, withdrawing from a money market account is relatively simple and can be done several times without receiving a penalty or fee. This can make it too tempting for you to withdraw funds early instead of saving them to reach your financial goals.
Get the most out of your investment with the help of a ProVise financial advisor
Navigating the fiduciary landscape on your own is like being blindfolded and trying to find your way around a busy city. It can be difficult to reach your destination and to lower your risks along the way. That is why you should consult a CERTIFIED FINANCIAL PLANNER™ professional at ProVise Management Group for assistance.
Our ProVise financial advisors can act as your guide when you are blindfolded in the city. We know how to navigate the ins and outs of the complicated and rapidly changing fiduciary landscape. Our team works closely with you to determine the best financial strategies to help you reach your long-term financial goals. Your strategy might include investing in money market accounts or might take you in a different direction entirely.
We always personalize our plans based on your values, goals and risk tolerance. Our ProVise financial advisors will provide a plan for you at a fiduciary standard of care with an unconditional money-back guarantee if you are unsatisfied with your written plan. All you need to do is return it to us and we will refund 100% of the fee paid.
Are you ready to continue your investment journey with the guidance of a highly qualified financial professional? Contact ProVise today to schedule a consultation.