Setting aside money for a rainy day is a critical step toward financial security, but the paltry returns offered by traditional savings accounts—the national average annual percentage yield (APY) is just 0.43%—can be frustrating.
Cash management accounts can be a valuable alternative, offering higher interest rates that are 10 to 15 times those dismissable rates above. However, they work differently than savings accounts, so it's important to understand their ins, outs, and regulations before opening a cash management account.
What is a cash management account?
A cash management account is like a turbocharged money market account, with easy access to your cash and a debit card for everyday expenses. Your balance also earns a tidy annual percentage yield (APY), something typically reserved for accounts with limited access, like high-yield savings accounts and certificates of deposit (CDs).
Merrill Lynch introduced the first cash management accounts in 1977. Back then, they were structured as money market mutual funds with check-writing privileges. Their popularity has since grown, and today, they're offered by various non-bank entities, such as brokerage firms, mobile investing apps, and robo-advisors.
Generally, a cash management account’s APY adjusts with the market. And right now, rates on cash management accounts tend to be quite high.
"Interest rates have been rising across the industry," said Kyle McBrien, a financial planner with Betterment. "And that's basically because of the Federal Reserve raising rates to help cool inflation."
In addition to competitive interest rates, cash management accounts also offer more flexibility than savings accounts. When you open a cash management account, you can quickly and easily access your cash through electronic transfers, writing checks or using a debit card. With savings accounts, you may be limited to six withdrawals per month, depending on your bank.
How do cash management accounts work?
There are two main types of cash management accounts:
- Bank sweep accounts. With a bank sweep account, the investment firm or brokerage automatically transfers—or sweeps—your money into a deposit account with one or more of its partner banks.
- Money market sweep accounts. A money market sweep account functions similarly to bank sweep programs. Instead of sweeping cash into deposit accounts, your money is transferred to one or more money market mutual funds that invest in short-term, low-risk securities.
Account features and structure, fees, and balance requirements differ by the platform offering the cash management account. But generally, they have low fees and account minimums.
And because some cash management accounts will sweep your money into more than one account, you may have access to increased Federal Deposit Insurance Corporation (FDIC) insurance limits.
"I think more people now know about [FDIC deposit insurance] because of what happened just recently with the collapse of Silicon Valley Bank, but FDIC is important to understand," said Paul Sydlansky, a certified financial planner with Lake Road Advisors and a member of the National Association of Personal Finance Advisors. "You really want to make sure that you have that protection there for your assets."
With FDIC insurance, your deposits are insured up to at least $250,000 with qualifying banks—per depositor and per ownership category—in the rare instance of bank failure. However, some brokerage firms now offer significantly more coverage through their sweep account partnerships.
Pros and cons of cash management accounts
If you're looking for a safe place to stash your money, a cash management account is a low-risk way to save and earn interest. However, it's not always the best tool for your money, so consider the benefits and drawbacks before opening an account.
Pros
- Higher APY than traditional savings accounts
- May offer higher FDIC insurance limits
- Low fees and account minimums
Cons
- Variable APY
- Lower yields than stock market
- Lack personal attention of local bank
A deeper look at the pros and cons of cash management accounts
Higher APYs than traditional savings accounts
As of August 21, 2023, the average APY for savings accounts was just 0.43% and a mere 0.07% for checking accounts. But with cash management accounts, your money can grow at a rate as high as 4.80% — about 11 times the average for savings accounts.
Higher FDIC coverage limits
Cash management account bank sweep programs deposit your money into one or more accounts. If you have over the typical FDIC limit of $250,000 in the account, the brokerage firm will spread your dollars across several banks, giving you more coverage. Maximums vary by platform, but some provide as much as $5 million in FDIC coverage.
Low fees and account minimums
Cash management accounts often have low deposit minimums, allowing you to open an account with as little as $1. And many platforms offer fee-free accounts, so no monthly maintenance fees exist.
Cons
The APY is not locked
Although cash management accounts advertise higher APYs than you'll find with traditional checking or savings accounts, the rates are not fixed, so the rates can decrease as market conditions change. That's in contrast to products like certificates of deposit (CDs), which can have an APY that is fixed for the life of the CD term.
Lower yields than investing
With cash management accounts, you can earn an APY as high as 4.80%, significantly higher than the average APY for savings accounts. But the stock market may be a better choice for those saving for long-term goals like retirement. Over the long term, the stock market has historically delivered annual returns of about 10%.
"What we would recommend you do with your retirement savings is invest it into the market," said Kate Wauck, chief communications officer with Wealthfront. "Most of our clients are in their mid-30s, so they have a longer time horizon to invest. And so our recommendation for any money that you don't need within the next three years is to invest it."
Lack personal attention
Cash management accounts are usually offered in conjunction with brokerage accounts or through mobile investing apps, and robo-advisor platforms. They are online-only accounts, so you handle all of your transactions through your desktop or a mobile device. Since these platforms rarely operate physical branches or offices, you likely can't visit a teller in person or build a relationship like you would with a local bank or credit union.
"For me, the catch [of a cash management account] is the loss of the relationship with our clients," said Sydklansky. "The ability to be able to go into your local bank, have a relationship with somebody who you can reach out to when you have a need like a mortgage, a home equity line of credit, a private loan, a business loan—there are just so many ways that establishing a local relationship can benefit you down the road."
Which bank has the best cash management account?
Although Merrill Lynch was the first to introduce cash management accounts in the 1970s, more companies offer these accounts now. You can find them from various non-bank entities, including online investing platforms.
When comparing your options, key elements to consider include:
- Account minimums: Although many brokerages have low account minimums, that's not the case for all companies that offer cash management accounts. Some platforms require customers to deposit $500 or more to open an account, which may be a barrier for those just starting out who don't have a lot of extra cash handy.
- Fees: Many cash management accounts are available with no account fees, but some platforms charge monthly or annual fees. Fees vary by platform but typically range between $0 and $10 per month.
- APY: Each platform sets its own APY. While some platforms offer rates that are 10 or 11 times higher than the average APY for savings accounts, others have more modest rates.
Popular cash management accounts
Rates and account minimums vary by platform, but below are five of the most popular cash management accounts available now:
Aspiration
Current APY: 1.00%
The Aspiration Spend & Save account has no monthly fees and gives customers five free ATM withdrawals per month. And when you spend money at qualifying socially-conscious companies, you can earn unlimited 1% cash back. Deposits of up to $250,000 to the Spend & Save account are FDIC-insured, and you can open an account with as little as $10.
Betterment
Current APY: 4.75%
Although Betterment is known for its robo-advisor investing platform, it also offers a high-yield cash management account, Betterment Cash Reserve. No minimum balance requirement exists, and Betterment doesn't charge any monthly fees. And your deposits of up to $2 million ($4 million for joint accounts) are insured through the FDIC. You can open a Betterment Cash Reserve account with as little as $10.
Fidelity
Current APY: 2.72%
Fidelity is one of the largest investment companies in the world based on assets under management. Compared to platforms like Betterment and Wealthfront, the rates on its Cash Management account are lower, but Fidelity offers a higher APY than most savings accounts and doesn't charge account fees. Account holders get access to a secure debit card, and Fidelity will reimburse you for ATM fees. Deposits up to $250,000 are backed by FDIC insurance.
TD Ameritrade
Current APY: 0.35%
TD Ameritrade is a major investing company that offers both self-directed and broker-assisted investing options. Its cash management account, the TD Ameritrade Transactional Cash account, provides FDIC insurance for up to $500,000 in deposits, and users can deposit checks and make withdrawals through a mobile app. However, TD Ameritrade has a lower APY than other companies; its rate is lower than the national average for savings accounts.
Wealthfront
Current APY: 4.80%
Wealthfront boasts the highest rates of all five companies, advertising an APY of 4.80%. Wealthfront's Cash account has no account fees and offers unlimited withdrawals and transfers. Your deposits are FDIC-insured up to a maximum of $5 million—the highest limit of the five companies—and there's no minimum balance requirement. You can open a Wealthfront Cash account with as little as $1.
"The reason that we launched this account is really to provide a place to store your short-term cash before you're ready to invest it," said Wauck. "So again, we are an investment advisor. And so what we're really trying to do is get our clients ready to invest for the long term."
Note: APYs mentioned above are accurate as of September 6, 2023, and are subject to change.
Are cash management accounts FDIC-insured?
Whether cash management accounts are secured by FDIC insurance depends on how the account is structured. Cash management accounts that use bank sweep programs provide FDIC insurance; the standard is $250,000 per depositor per ownership company and insured bank.
However, if your cash management account is part of a money market sweep, FDIC insurance doesn't apply. Instead, your money is covered by the Securities Investor Protection Corporation (SIPC), which insures the cash in your investment account up to a maximum of $250,000 if your brokerage firm fails.
Cash management accounts vs. money market accounts
Like cash management accounts, money market accounts (MMAs) boast higher rates than savings accounts. Typically offered by financial institutions like banks or credit unions, MMAs are backed by FDIC or National Credit Union Association (NCUA) insurance, and they give customers check-writing privileges and debit card access. MMAs usually have higher minimum balance requirements than cash management accounts and may charge monthly account fees.
Cash management accounts usually have lower fees, lower minimums, higher APYs, and higher FDIC coverage limits than MMAs. But cash management accounts rarely offer the personal touch that you can get with an MMA opened with a local bank or credit union.
The takeaway
Opening a cash management account can be a smart option for your emergency fund or other savings goals since it typically has low fees. You can deposit your money and earn a higher rate of interest than you'd get with a traditional savings account, helping your money grow faster.
However, whether a cash management account is the best option depends on your financial goals and time horizon. For longer-term goals, such as your retirement fund, investing in the stock market is likely a wiser choice so you can take advantage of market growth.
"If [your] money is sitting in cash for several years, inflation really starts to take a toll on it," said McBrien. "And historically, the stock market has been a great hedge against inflation. So that's where those longer-term goals would be better served having some sort of stock exposure to help offset that impact."
