May 2, 2017

Money Market Accounts: Three Mistakes You May Be Making

Money market accounts serve the useful purpose of keeping your money safe and liquid, however they are often misunderstood and misused. These are the three most common mistakes people make when it comes to managing their money market accounts.

1. Not Thinking About Inflation

Placing money in a money market account will not help you outpace inflation in the long term. This is because while the inflation rate was low in 2015, the 20-year annual inflation rate average is 2.7%, and a typical money market account only pays about 1.0% interest.

Many argue that it is better to earn a small amount of interest in a bank rather than earn no interest at all. For the sake of argument, let’s assume that inflation is lower than the 20-year historical average. Even in this best-case scenario, the interest rates that banks will pay on these types of accounts will decrease as well, thus affecting the original intent of the account to begin with. Thus, while money market accounts are safe investments, they will not safeguard you from inflation.

2. Keeping Too Much In It

The changing rates of inflation can influence the efficacy of your money market account. In short, having a high percentage of your capital in these accounts is inefficient. The recommendation for the amount of money that should be kept in cash in these types of accounts for unforeseen emergencies and life events is typically, 6-12 months of living expenses. Beyond that, the money is essentially just sitting there losing its value.

3. Using Money as an Emotional Safety Blanket

Many people are programmed to believe that hoarding money is the most fruitful approach. When it comes to money market accounts and keeping money in standard savings accounts, though, this approach does not hold true. It is often difficult to have your hard-earned money thrust into the open market. Unfortunately, because of fear, many people sit on their cash positions far too long instead of investing.

The Great Recession led already-weary investors further into the cash-hoarding rabbit hole; however, high-yield returns on your money can only come from diverse investments. Fifty years ago, you could stow money away little by little each day and be confident you would be okay, but modern times dictate a far different future for your financial stability.

The Bottom Line

Money market accounts serve a singular purpose – to keep your money parked. Money, though, does nothing unless it is moved. Beyond the amount required to safeguard you against an unforeseen life event, the best option is to do your research and invest more diversely.