What are some advantages and disadvantages to putting my money into a money market account?

Question

What are some advantages and disadvantages to putting my money into a money market account?

Answer 1

A Mutual Fund money market account is not FDIC insured. They are historically very safe.  Money Market accounts used to be better for earnings.... but today that's not always true.

My two favorite FDIC insured favorites are;

www.GMACBank.com

www.HSBCDirect.com

Answer 2

Advantages

- Make money with your money

- Liquid

- Mostly Safe

Disadvantages

- Low Interest Rates

- Can lose value

- Not FDIC Insured

Answer 3

Good points by the other respondents.

Money market accounts make their interest by investing in short term commercial backed paper. (that's fancy talk for bonds underwritten by companies and sometimes governments)

Assuming that nothing happened to these companies your cash would be "sound as a pound".  Imagine for a second that Bear Stearns was not saved by J.P. Morgan.  Anyone who held those bonds (Banks etc..) would lose their investment.  Any instrument (M.M. acct.) that held that paper would lose value.  Any banks or brokerages that lost capital due to a failure of that sort would lose a credit rating.

Essentially it would be a domino effect that would have devastating effects.

So if you are worried about the above scenario, put your money in an F.D.I.C. insured account.  Every bank offers them.

This means that if your institution goes bankrupt, you are covered up to 100 thousand per account.

Good luck!

Answer 4

As sub prime has proven, money market accounts are not guaranteed to  give you security of capital the way a CD or savings account does.

But over long periods money market accounts have been fairly predictably somewhat safe repositories that pay just a bit more than most savings accounts do. Any savings account offering more is likely to cut its rates soon.

So, weighing safety against revenue, they pay better for a bit less security than a bank savings account.

On the other side of the ledger,  a bond that you can buy and sell, offers a nominally higher yield, but for long term bonds, if interest rates rise, you can lose a large part of the value of the bond in the near term.

Money market accounts  do not lose value when interest rates rise, and do not gain when interest rates drop. So, if you believe that interest rates will soon rise, avoid long term bonds. But long term bonds are better than money market if interest rates drop.