Here’s When a Cash Management Account Is Better Than a Savings Account
If you’ve been looking for a place to store your cash that offers better interest rates than a traditional bank account, you may have heard of cash management accounts.
A cash management account is an alternative to a regular checking or savings account and is a type of investment account offered by brokers and investment firms that allows you to hold cash while earning interest on your balance. Let’s take a closer look at how they work and how they differ from regular bank accounts.
How do cash accounts work?
Cash management accounts essentially combine checking, savings and money market functions. They allow you to earn interest on your cash balance, write checks or make debit card purchases, and easily transfer funds to and from other investment accounts you may hold with the broker.
Your money is kept in an account with one or more partner banks, which are listed on the company’s balance sheet. The broker can then invest this pooled cash in conservative investments such as money market funds and earn higher returns than a regular bank account would. A portion of this income is then passed on to you as interest on your cash balance.
Cash management accounts are designed to provide easy liquidity so you can withdraw cash as needed without any penalties, similar to a checking account. However, they usually do not have access to ATMs or physical branches like banks.
Interest Rates and FDIC Insurance
Interest rates on cash management accounts can vary slightly between brokers, but in general they tend to be higher than standard bank accounts. Currently, rates from large brokers fluctuate between 3-4%.
Funds in the account are eligible for FDIC insurance up to the standard limit of $250,000 per person and per institution. However, larger balances may not be covered depending on the firm’s specific insurance arrangements.
Pros and cons of a cash settlement account
pros
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Higher interest rates than standard bank accounts
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Federal Deposit Insurance Corporation (FDIC) balance insurance
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Easy liquidity and access to cash
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Integrated with other investment accounts at the broker
Minuses
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Lack of physical access to the branch.
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Limited ATM access (varies by broker)
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Possible loss of FDIC coverage for very large balances
Cash management accounts can be a great option for getting more value from your free cash while keeping it highly liquid and safe. Just be sure to pay attention to the specific interest rates, insurance coverage and availability details for the account you choose. For larger amounts, you can still use a combination of bank and brokerage accounts.