Putting all of your money in an account with such little growth until you’re nearing the time you’ll need that money for retirement is generally not a good idea. However, you could be willing to pay that price for the money in your emergency fund. This topic outlines money market account disadvantages which will assist you to achieve desired goals in your life.
Investments with a poor rate of return are more susceptible to inflation, which is a problem in and of itself. Both of these movements deserve the attention of investors. Money market accounts are a bad long-term investment if the return on your money is less than the rate of inflation. For more insights on importance of money market topic, check out this informative blog post.
Money Market Account Disadvantages
Money market accounts from Mountain America are a convenient method to save money without limiting your access to it. You might think of it as a convenient savings account and CD rolled into one convenient product. Continue reading to become an expert in money market account disadvantages and learn everything you can about it.
Better Rates May be Available Elsewhere
The finest money market accounts do provide opportunities to earn money, but it’s important to remember that your savings may earn a higher return on other, more stringent investments. You should keep this in mind.
Money market accounts don’t provide as high of returns as other investment options like certificates of deposit (CDs) due to the time it takes for the CD to mature. This is because the interest rate offered by the bank will increase the longer you deposit funds. You could earn a rate of up to 3% on a certificate of deposit if you kept it for two years, for instance. Consider the possibility of a decrease in return when making your decision about whether or not to open an account.
Fees
It’s important to be aware of any fees that may be associated with opening a bank account. A money market account may incur a monthly maintenance fee from the bank. It is possible to avoid this cost with some banks, although this is not the norm. Keeping a minimum daily balance or setting up automatic payments are two ways to circumvent this charge. The interest you make on your funds each month will inevitably decrease proportionately to the size of the expense.
You have to Pay Taxes on any Interest you Get
Any interest you earn on a money market account for the current tax year is taxable. The financial institution you deal with will provide you with the necessary documentation to access these money. You can calculate the sum you owe by adding together your past and present incomes. It’s possible that the initial investment required to start one of these funds will more than cancel out any annual gains. Interest may not seem like much, but failing to pay taxes on it can result in hefty fines or even jail time. Money market account disadvantages often have restrictions on the number of transactions you can make in a month, typically with a maximum limit of six transactions.
Taxes and Price Increases
Federal income tax will reduce your take-home pay from interest on a savings or money market account. When the interest rate offered by a bank is lower than the inflation rate, a person’s purchasing power declines. According to Don Taylor, a columnist for Bankrate.com, it is nearly always worthwhile to put some of your money in a higher-interest CD even if you have to pay a charge to withdraw your money out of the account early.
Capital Risk
Although money market funds are often secure investments, some have “broken the buck,” meaning the price of their shares has gone below $1. Money market funds, unlike savings accounts and certificates of deposit, are not insured by the FDIC in the event of a loss. For this reason, money market funds are classified as a moderately risky investment.
If you Break the Account’s Rules, you Could Lose your Interest Gains
You risk losing all of your yearly interest if you violate the terms of your money market account. If the withdrawal causes your account balance to fall below the required minimum, you will either need to make a deposit to bring it back up to the required level or revert to a standard savings account. Several companies are already embarking on this transition.
Transfers and Checks are Limited
Money market accounts are not ideal for making the kinds of monthly payments required to keep the lights on. Bankrate.com states that the monthly limit for computer transactions is six, with only three of them allowed using a debit card or check. Withdrawing cash in person, over the mail, or from an ATM is usually unlimited. Even if you don’t have a lot of monthly expenses, you still need a bank account.
Minimum Balance Needs
The minimum opening deposit for a money market savings account varies by financial institution. While opening an account at some banks requires only a single dollar, others require far larger sums of money. If you’re just starting your savings plan, a lack of sufficient funds might prevent you from opening a money market account with a local bank.
Risk of Inflation
Inflation is one of the most significant threats to money market funds. Inflation reduces the purchasing power of currency over time. Due to their low rate of return, money market funds are especially susceptible to inflation. If the rate of inflation is 3% and the return on your money market fund investment is 2%, for instance, your purchasing power will actually decrease. The value of your investment will decrease from $100 to $102 over the course of a year if you invest $100.
Each Year, the Total Amount of Money you have will Go down
U.S. inflation for 2019 was estimated at 2.3%. The rising cost of food and other items drove this figure higher, but falling energy costs contributed to the overall decrease. Money market accounts aren’t the best choice if you want your savings to grow in value. The annualized loss in purchasing power due to the average annual percentage yield (APY) offered by banks in the United States is 2.2 percent. Very few banks were offering interest rates that were potentially higher than the annual inflation rate.
Limits on Withdrawals
The procedures for withdrawing funds from a savings account or money market account are very similar. In the past, the number of withdrawals from these accounts was capped at six per month under Regulation D. While the coronavirus outbreak has necessitated the removal of these restrictions, individual banks may still implement withdrawal caps on money market accounts if they so choose. They can impose a fee if you withdraw more than the maximum allowed.
The Customer has to Figure out if their Money Market Account is Protected
The number of institutions offering money market accounts to customers has expanded beyond banks and credit unions. This is due to the expansion of alternatives to conventional banking. Both Credit Karma and T-Mobile provide numerous cost-cutting and monetary-saving options. You risk losing your FDIC or NCUA protection if you move your money to one of these alternatives. Still, you may be able to get better returns on your money with these alternatives.
Money market accounts and other types of investment accounts may not provide the same level of security. Donating money online? Be sure your personal and financial details are protected by reading the site’s terms and conditions beforehand.
The Interest Rate on a Money Market Account Changes most of the Time
A money market account’s interest rate is variable and may change at any time. It’ll shift in response to shifts in the market interest rate. Financial institutions incur maintenance and transaction costs for money market accounts, impacting the predictability of your returns.
Interest Rates that Change
The rate of interest paid on a money market account typically varies with the balance in the account. This is why the standard minimum deposit for the best rates is $10,000. There is no guarantee that the interest rate associated with a money market account will remain constant over any given period of time. In the event of a decline in the market interest rate, your financial institution may be able to offer you a cheaper interest rate. A money market account will not provide you with a secure interest rate.
Money market deposit accounts have varying APYs, some comparable to savings accounts. Higher interest rates may require a minimum balance of $5,000 or $10,000. These factors can deter those seeking maximum returns from opening such accounts.
FAQ
Is it Smart to have a Money Market Account?
Money market accounts provide access to low-risk, safe investments like T-bonds with better interest rates than savings accounts. They are ideal during uncertain economic times as even small earnings are better than none.
Does a Money Market Account have to be Taxed?
Investing in a mutual fund that focuses on the money market is one of the safest things you can do with your money.Income from money market funds may or may not be subject to taxation, depending on the type of securities the fund invests in.
Can the Money you Put into a Money Market Account be Lost?
The interest rate on a money market account, a subset of the savings account category, is typically higher than that on a traditional savings account. This is why many people who want to put money away but don’t want to take any chances choose for this method. However, any company endeavor carries with it the inherent risk of financial failure.
Final Words
Access to your funds is easier than with a CD, but you are still limited in what you can do with them. Once you’ve reached your money market account’s monthly transfer limit, you won’t have access to those funds until the following month. We’ll look at the money market account disadvantages and talk about the related topics in this area.
