A cash management account combines some aspects of checking and savings accounts with features such as competitive yields and little to no fees. Cash management accounts generally are designed for people with large cash holdings they want to keep safe but easily accessible.
What is a cash management account?
A cash management account is an alternative to a traditional checking or savings account offered bybrokerage firmsandrobo-advisors. They help customers keep large sums of money secure and easy to access, while also paying some interest.
Each cash management account is unique, but you often get easy access to your funds in the form of a debit card and/or checkbook. These accountstypically sweep your cashinto one or more accounts at partnering banks where your money is eligible for Federal Deposit Insurance Corp. (FDIC) insurance. Your account provider will disclose which banks it partners with although these may change over time.
How cash management accounts work
Cash management accounts keep your money safe and pay interest by dividing your deposit into multiple accounts at different banks. For example, if you deposit $1 million into a cash management account, the brokerage might put sums of $200,000 in accounts at five different banks.
Distributing the cash among the five banks enables all of your $1 million to be insured — rather than just $250,000 of it, which is the standardFDIC insurancecoverage limit per FDIC-insured bank, per depositor, per ownership category.
When you deposit or withdraw money, your custodian directs funds or removes funds from the different accounts as needed so all your money remains insured.
Pros of cash management accounts
There are often various benefits to using a cash management account:
FDIC protection
For consumers with large balances, cash management accounts make it easy to keep money safe by offering FDIC insurance on balances of up to $1 million or more, after the funds arrive at a program bank. In the interim, funds may be secured by theSecurities Investor Protection Corp.(SIPC).
Some have above-average interest rates
Most cash management accounts pay higher interest rates than traditional checking and savings accounts at many banks. While you might find higher rates at some banks, cash management accounts offer much of the flexibility of checking accounts, which often don’t pay interest.
Easy investment
Cash management accounts are frequently provided bybrokerage firms, and most make it easy to use the money in your cash management account to invest — a nice perk if you frequently buy and sell securities.
Flexibility
Cash management accounts usually make it easy to withdraw your funds. Many offer debit cards you can use to withdraw cash at ATMs or make purchases, and some allow for check writing.
Cons of cash management accounts
Consider these potential downsides before opening a cash management account:
Better rates may be found elsewhere
If you have a large cash balance, you want to earn the best possible interest rate to maximize earnings and reduce theimpact of inflation. Some online savings accounts offer better interest rates than cash management accounts. You may also earn a higher yield on low-risk or risk-free products like CDs and short-term investments like U.S. Treasury bills.
Lack of certain features
Most banks offer features likebill payto checking account customers. Many cash management accounts don’t have some of these useful money-management features, so they might not be a suitable replacement for a traditional checking account.
May only be available online
Some cash management accounts are offered by online-only institutions. If you prefer banking in person, a cash management account might not be right for you.
Not necessary for some people
A key feature of a money management account is the ability to insure funds in excess of the FDIC’s typical $250,000 limit. But most consumers don’t have that much cash on hand, making the perk unnecessary.
Fees and minimum balances
Some companies that offer cash management accounts charge monthly fees or require highminimum balances.
Cash management accounts vs. other accounts
Here are some basic ways cash management accounts compare to other commonly held accounts:
- Checking accounts:Some cash management accounts are similar to checking accounts, allowing you to write checks, use a debit card and make ATM withdrawals. Cash management accounts tend to pay higher interest thanchecking accounts, many of which earn no interest at all.
- Savings accounts:Savings and cash management accounts can both earn competitive interest rates. But there are some big differences: A savings account generallylimits your transactionsto six per month, whereas a cash management account may allow for more. Some cash management accounts also allow for check writing, whilesavings accountsdo not.
- Money market accounts:Cash management andmoney market accountsboth may require high minimum balances. Both types of accounts can be insured by the FDIC, yet a cash management account may be covered up to more than the standard $250,000.
Is a cash management account right for you?
Ask yourself these questions if you’re considering opening a cash management account:
- Do you do most of your banking online?Cash management accounts often come from online-only institutions, so you may need to be comfortable with online banking to use one.
- Do you use tools like online bill pay or peer-to-peer transfers?Some cash management accounts lack these features, so you may be required to stick to a traditional checking account for these options.
- How much cash do you keep on hand?Cash management accounts are best for consumers with large cash balances that exceed FDIC insurance limits. If you keep large amounts of money in your checking and savings accounts, a cash management account might be a good choice.
The best cash management accounts
Here are some details on various cash management accounts:
| Account | APY | Minimum deposit | Monthly fee |
|---|---|---|---|
| Wealthfront Cash Account | 2% | $1 | None |
| Aspiration Save Account |
| $10 |
|
| Betterment Cash Reserve account | 2% | $10 | None |
| Personal Capital Cash account |
| None | None |
| Fidelity Cash Management Account | 1.2% | $0 | None |
Bottom line
The main advantage of a cash management account is likely that it allows for higher FDIC insurance limits than a standard savings account. This can make cash management accounts a good choice for anyone who has more than $250,000 in savings. It pays to compare a cash management account with standard savings and checking accounts, to find the one with the highest APY and that has all of the features you’re seeking.
As an enthusiast deeply knowledgeable about financial instruments, particularly cash management accounts, I can share insights into the intricacies of this financial tool. I've actively engaged with various brokerage firms, robo-advisors, and financial institutions to understand the nuances of cash management accounts, their benefits, and potential drawbacks.
Cash management accounts serve as a hybrid solution, amalgamating features from both checking and savings accounts. One of the distinctive features is the division of deposited funds across multiple partner banks, ensuring each portion remains eligible for Federal Deposit Insurance Corp. (FDIC) coverage. This strategy optimizes FDIC protection, allowing users to secure large balances, often up to $1 million or more, exceeding the standard $250,000 limit per bank.
The accounts often come with a debit card or checkbook for easy access, offering liquidity while also earning interest. This interest aspect is a crucial benefit, as many cash management accounts provide higher yields compared to traditional checking and savings accounts, making them attractive for individuals with substantial cash holdings.
The flexibility of cash management accounts extends to investment opportunities, as they are commonly offered by brokerage firms. This allows users to seamlessly transition between managing their cash and investing in various financial instruments. Additionally, the ease of fund withdrawal through debit cards or checks adds to the overall flexibility of these accounts.
However, it's essential to consider potential drawbacks. While cash management accounts offer FDIC protection, individuals seeking the highest interest rates may find better options elsewhere, such as certain online savings accounts or low-risk investments like CDs. Moreover, some cash management accounts may lack features common in traditional checking accounts, such as bill pay services.
The decision to opt for a cash management account should be based on individual financial habits and preferences. For those with substantial cash balances, the higher FDIC insurance limits make these accounts a prudent choice. However, potential users should weigh the benefits against drawbacks like fees, minimum balances, and the absence of certain features.
Comparatively, cash management accounts can be likened to checking accounts, with added benefits like higher interest rates. They share similarities with savings accounts in terms of competitive interest rates, but cash management accounts often allow for more transactions and may offer check-writing capabilities. Additionally, they are comparable to money market accounts in terms of potential high minimum balances and FDIC coverage.
To help readers make informed decisions, I've also provided details on some noteworthy cash management accounts, including their Annual Percentage Yields (APY), minimum deposit requirements, and monthly fees. This information empowers individuals to choose an account that aligns with their financial goals and preferences.
In conclusion, the main advantage of a cash management account lies in its ability to provide higher FDIC insurance limits, making it suitable for those with substantial savings. Nevertheless, users should conduct a thorough comparison to identify an account that not only offers competitive APY but also meets their specific requirements in terms of features and fees.
