3 Signs You Have Too Much Money in Your Money Market Account

If you have a money market account or have extra cash stored in money market funds in your brokerage cash management account, you are not alone. According to Bloomberg, money market funds recently hit a new all-time high of $6.46 trillion. Money market accounts are slightly different from money market funds, but both invest in similar types of short-term assets and provide similar cash returns.

There are many good reasons to keep your money in a money market account. These accounts are low-risk and highly liquid, and the accounts offered by reputable banks come with FDIC insurance. And your cash may earn a higher APR than the best CDs or savings accounts—as of this writing, some of the best money market accounts offered APRs of 4.80% to 5.20%.

But there is such a thing as having too much cash. If you feel too risk-averse or make money moves based on short-term fears rather than long-term planning, your money market account balance could be holding you back.

Let’s look at some warning signs of having too much money in your money market account.

1. You already have a healthy emergency savings fund

A classic personal finance rule of thumb is that you should have three to six months’ worth of expenses in an emergency fund. For many people, that might mean storing $15,000 to $30,000 in cash – in a safe, liquid, and easily accessible savings account or money market account (not a CD).

But if you have already saved more than “enough” for your emergency savings fund, You may be missing out on better investment opportunities if you hold onto too much cash in a money market account. You may want to think about investing some of that extra money in other assets, such as diversified stock or bond ETFs, that have potential for higher growth.

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2. You’re not maxing out your IRA

Another sign that you have too much cash is not taking advantage of the benefits of a tax-deductible traditional IRA or not making after-tax contributions to a Roth IRA. In 2024, individuals under age 50 can contribute up to $7,000 (combined) to a traditional IRA and a Roth IRA.

The tax benefits you get from maxing out your IRA could be worth much more than the APR on your money market account. Here’s why.

Traditional IRA: Instant tax deduction

When you contribute money to a traditional IRA, you may be able to deduct some or all of the amount from your taxes, depending on your income. For example, if you’re in the 22% tax bracket and contribute $7,000 to a traditional IRA, your tax bill will be reduced by about $1,540. That’s better than the $350 you could earn on $7,000 in a year at 5% APR.

Roth IRA: Tax-free withdrawals in retirement

Not everyone can use a Roth IRA (there are restrictions for those with higher incomes), and a Roth IRA doesn’t give you an upfront tax deduction for the money you contribute. A Roth IRA allows your money to grow tax-free and allows you to make tax-free withdrawals in retirement.

Are your IRA accounts already maxed out? If so, feel free to keep extra cash in a money market account. If not, you may want to move more money from your money market account into a traditional IRA or Roth IRA (depending on which account type you qualify for and which tax benefits you prefer).

3. You’re not investing appropriately for your long-term goals

If you find yourself hoarding too much cash in safe but relatively low-interest cash accounts like a money market account, you may want to take a step back. Ask yourself:

• How does this money fit into my overall financial plans?
• Am I saving enough money for retirement?
• Will I get a full employer match for my 401(k)?
• Am I investing in a diversified mix of stocks, bonds and other assets that suit my time horizon?

Sometimes people hold too much cash because they are afraid of short-term risks. They are afraid of losing their job, so they want to have an emergency fund that is larger than necessary. They are afraid of losing money due to short-term ups and downs in the stock market, so they keep their money in cash instead of purchasing stocks appropriately as part of a long-term strategy.

Holding too much money in cash can cause you to “time” the market in self-destructive ways, gradually missing out on long-term returns that help you build wealth.

Conclusion

If you already have a sufficient emergency fund and are not maxing out your tax-deferred retirement account, you may want to shift some cash from your money market account into investments. Having too much cash may feel good in the short term, but it can hinder your ability to grow your money through long-term investments.