Money market accounts are quite useful for investors to keep their money safe and liquid. However, there are often mistakes committed. Here are some of the most common investor mistakes in terms of money market accounts.
Money Market Account vs. Money Market Fund
Never be confused between money market accounts and money market funds, because that’s one of the biggest errors investors usually commit. There are important differences between the two.
Money Market Account
Money market accounts are deposit accounts held at banks, which bear principals protected by the Federal Deposit Insurance Corp (FDIC). These accounts offer similar benefits to savings accounts.
On the other hand, a money market account requires that a minimum balance is held in the account for a designated period, usually around a year. Money market accounts invest in low-risk, stable funds like Treasury Bonds and typically will pay higher rates of interest than a savings account.
Money Market Fund
A money market fund is a mutual fund characterized by low-risk and low-return investments. Getting in and out of a money market fund is easy since there are no loads associated with the positions.
On the other hand, investors will hear “money market” and assume that their money is perfectly secure, but this isn’t true for money market funds since they are investment product, and because they are investment products, they have no FDIC guarantee.
Forgetting about Inflation
Investors also mistakenly think that letting their money sit in money market accounts guards them from inflation. However, the truth is that the money parked in a money market account wouldn’t likely outpace inflation.
Many also point out that it is better to earn with small interest than not earn at all. However, outpacing inflation in the long term is not what a money market account is for.
For instance, let’s suppose that inflation is lower than the 20-year historical average. Even if that’s the scenario the interest rates that banks will pay on these types of accounts will decrease as well. It affects the original intent of the account to start with.
Keeping Too Much In
Obviously, the changing rates in inflation affect money market accounts. That means it is not ideal to have a large percentage of your capital in these accounts. Usually, 6 to 12 months of living expenses are the recommendation for the amount of money that should be kept in cash in these types of accounts for unforeseen emergencies and life events. Outside of that, your money is basically parked and losing value.
Emotional Safety Net
Hoarding money would not be efficient in terms of money market accounts and keeping money in standard savings accounts. It is quite difficult to have hard-earned money into the open market and all the uncertainty that comes with it. Unfortunately, people tend to hold on to their cash positions for too long instead of investing it because of fear.
Not Dividing It Up
Among the top rules of thumb in the world of investing is the principle of diversification. That also applies to cash. If you insist on holding all of your money in money market accounts, no one account should be holding more than the FDIC insured amount of $250,000.