Disadvantages of a Money Market Account

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.

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.