Is a money market account safe during a recession?
Money market funds can protect your assets during a recession, but only as a temporary fix and not for long-term growth. In times of economic uncertainty, money market funds offer liquidity for cash reserves that can help you build your portfolio.
Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker.
The risks of money market accounts
MMAs are considered very low risk in general, especially if the depositor's total balance at the bank or credit union is below the applicable FDIC or NCUA limit. FDIC or NCUA standard insurance covers up to $250,000 per depositor per ownership category at each financial institution.
Investors seeking stability in a recession often turn to investment-grade bonds. These are debt securities issued by financially strong corporations or government entities. They offer regular interest payments and a smaller risk of default, relative to bonds with lower ratings.
Generally speaking, money market accounts are very safe. At banks, money market account balances are insured by the FDIC, and at credit unions, balances are insured by the NCUA. Both the FDIC and NCUA insure up to $250,000 per depositor, per account ownership category per insured institution.
A15: If a money market mutual fund held securities on which the U.S. Treasury defaulted on the payment of interest or principal, then the fund would need to sell those defaulted securities, unless the fund's board of trustees determines that disposing of the securities would not be in the best interests of the fund.
Both money market funds and CDs are relatively safe investments, delivering an income stream in the form of interest or dividends. Money market funds are generally more liquid than bank or brokered CDs.
Money market accounts are considered safe, low-risk investments. They earn interest and allow for easy access to your money. Your balance is also FDIC-insured, so it's unlikely that you'll lose money. However, fees and interest rate changes could deplete your returns.
- Limited transactions. Some accounts limit certain transfers and withdrawals (known as convenient transactions) to six per month, so this isn't the best account for regular banking. ...
- Deposit and balance requirements. ...
- Fees. ...
- High interest rates. ...
- Flexible access. ...
- Federal insurance.
It's technically possible to lose money in a market account, but not in the same way you can lose money in an investment account. Depending on the terms of your money market account, you could lose value to fees and inflation.
What not to buy during a recession?
Don't: Take On High-Interest Debt
It's best to avoid racking up high-interest debt during a recession. In fact, the smart move is to slash high-interest debt so you've got more cash on hand. Chances are your highest-interest debt is credit card debt.
If you're worried about keeping money in your bank account during a recession, you can rest assured that your money will likely be safe at a financial institution, and you won't need to take it out of your bank account.
Cash, large-cap stocks and gold can be good investments during a recession. Stocks that tend to fluctuate with the economy and cryptocurrencies can be unstable during a recession.
The Bottom Line. Both money market accounts and money market funds are relatively safe, low-risk investments, but MMAs are insured up to $250,000 per depositor by the FDIC and money market funds aren't.
Money market accounts and savings accounts are equally safe places for consumers to keep their savings. However, it's important to open accounts at banks that are covered by FDIC insurance. You can check if your bank is FDIC-insured here.
If you're saving for something you'll need the money for in less than three to five years, saving in a money market fund may make sense for you. Money market funds are ideal for short-term saving because they invest in highly liquid securities with the objective of capital preservation and income.
First and foremost, money market accounts are typically safe because they're insured by the federal government. If you open a money market account at a federally insured bank, the Federal Deposit Insurance Corp. (FDIC) insures up to $250,000 of your cash per bank, per depositor.
On Sept. 16, 2008, the Reserve Primary Fund broke the buck when its net asset value (NAV) fell to $0.97 cents per share. It was one of the first times in the history of investing that a retail money market fund had failed to maintain a $1 per share NAV.
Although money market funds aren't covered by Federal Deposit Insurance Corp. (FDIC) insurance because they're mutual funds, not bank accounts, they're still safe. (Note that money market funds are different than money market accounts, which are a type of deposit account offered by banks and credit unions.)
Top Nationwide Rate (APY) | Balance at Maturity | |
---|---|---|
6 months | 5.76% | $ 10,288 |
1 year | 6.18% | $ 10,618 |
18 months | 5.80% | $ 10,887 |
2 year | 5.60% | $ 11,151 |
Why shouldn't you invest all of your savings in a CD?
The biggest risk to CD accounts is usually an interest-rate risk, as federal rate cuts could lead banks to pay out less to savers. 7 Bank failure is also a risk, though this is a rarity.
If inflation is rising, it could outpace the rate of return you're earning on your CDs, especially in a low interest rate environment. This means even though your savings is growing, it won't stretch as far when it's time to spend it. Notably, this is also a risk when keeping money in savings and money market accounts.
Cash equivalents are financial instruments that are almost as liquid as cash and are popular investments for millionaires. Examples of cash equivalents are money market mutual funds, certificates of deposit, commercial paper and Treasury bills. Some millionaires keep their cash in Treasury bills.
Money is protected by federal insurance
At federally insured institutions, you don't have to worry about the safety of the funds in a money market account.
The Federal Deposit Insurance Corporation (FDIC), an independent government agency, insures deposit accounts—checking accounts, savings accounts, money market accounts that don't contain invested funds, and CDs, for example—at most banks and savings and loans institutions.
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