A money market account is a common, convenient way to safely invest cash. Money markets typically give their owners easy access to cash, a high level of safety and even check writing in some cases. However, compared to other investments, money markets have their share of disadvantages. Depending on your financial objectives, the costs and risk of money markets may make them unsuitable for you.
Minimums and Fees
Money market accounts often need a minimum balance to avoid a monthly service charge, which can be $12 per month or more. While you may get various services for that fee, many alternatives, such as savings accounts, are often free, especially if you work with a discount or online bank. If you have a small balance, the fees alone may eat up all of your earnings. You could also suffer from a tiered interest rate system where you'll earn a lower rate on your money than if you deposited more cash.
Low Interest Rate
Compared to other investments, money market accounts pay a low interest rate. While the long-term average return for the stock market is about 10 percent per year, money markets and other so-called "cash equivalents" have an average annual return of closer to 6 percent. Over time, that vast disparity in earning potential will get you far less money than you could have earned from stocks or bonds.
Inflation is a real concern when it comes to money market funds. Inflation makes money in the future less valuable than money today. Since money market funds earn a low rate of return, they are more susceptible to inflation risk. For example, if you earn 2 percent per year on a money fund, but inflation runs at 3 percent, you're actually losing purchasing power on your investment. If you invest $100, the $102 you have at the end of the year won't buy you as much as the original $100.
While money market funds are typically secure investments, some funds have "broken the buck," or fallen below $1 per share in value. Although the risk overall is small, money market funds don't carry the same FDIC insurance as savings accounts and CDs. This gives money market funds a slightly more aggressive risk profile than similar investments.
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