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How Do Cash Management Accounts Work?
Cash management accounts (CMAs) are a great way to manage your money efficiently, combining the best features of checking and savings accounts. Unlike traditional bank accounts, CMAs are held at non-bank institutions like investment or brokerage firms. They typically offer higher interest rates and features such as check-writing, debit cards, and online bill pay.
CMAs sweep your money into one or more accounts at a partnering bank, where it earns interest and is generally insured by the Federal Deposit Insurance Corp. (FDIC). This can provide higher FDIC insurance limits if your money is held in multiple accounts at multiple banks. If you like the idea of having all your money in one interest-earning account, a CMA may be worth investigating.
Pros and Cons of Cash Management Accounts
Pros
- Higher limits on FDIC coverage: By sweeping your money into multiple accounts at multiple banks, your CMA may allow you to keep more than $250,000 per account holder without exceeding FDIC limits.
- Competitive interest rates: CMAs generally offer higher interest rates than regular savings accounts.
- Fewer fees: Some CMAs don’t charge account maintenance fees, ATM surcharge fees, or other transaction fees.
- One account to do it all: You can earn interest, pay your bills, and invest all in one place.
- Earn interest on your checking account balance: Many bank checking accounts don’t earn interest, but CMAs do.
Cons
- Lack of personalized service: Most CMAs are managed online, so you may miss face-to-face interactions.
- FDIC insurance gaps: Your money may not be covered by FDIC insurance while it sits at your investment firm.
- Varying features: Different brokerages offer different features, so you need to shop around.
- No separation for savings: Money in a CMA may be more likely to be spent accidentally.
- Requirements and fees: Some CMAs have minimum balance or initial deposit requirements and may charge fees.
- Better interest rates can be had: While CMAs offer competitive rates, they may not be the highest available.
Cash Management Accounts vs. Checking
Some CMAs function very much like checking accounts, but there are key differences. For example, CMAs earn interest, while many checking accounts do not. Additionally, CMAs can offer higher FDIC insurance limits by sweeping funds into multiple bank accounts.
Checking Accounts vs. Cash Management Accounts
| Checking Account | Cash Management Account |
|---|---|
| Full range of deposit and payment options | Earns interest |
| FDIC insured up to $250,000 per person and account ownership type | May exceed $250,000 in FDIC insurance protection by sweeping funds into multiple bank accounts |
| Allows for separation between checking and savings | Eliminates the need for separate checking and savings accounts |
Banks vs. Brokerage Firms
Banks serve your transaction and savings needs, offering loans and credit cards with incentives for customers who have other accounts. Brokerage firms, on the other hand, streamline your finances by combining checking and savings into a single account, potentially held at the same firm that manages your investments.
How to Choose a Cash Management Account
Interested in learning more? Here’s how to better understand your options when it comes to CMAs and find an account that may be right for you:
- Find a financial institution: Start with your current brokerage or investment advisory firm, but also search online for alternatives.
- Compare APYs: Look at multiple options, including high-yield savings accounts, money market accounts, and CDs.
- Shop for features: Think about how you want to use your CMA and shop for the features you need, such as debit cards, mobile check deposit, and online bill payments.
- Check FDIC insurance coverage: Ensure your entire account balance will be covered under FDIC insurance.
- Consider convenience: Evaluate how easy it is to access information and get help, both online and by phone.
The Bottom Line
A CMA is a bank account alternative that may replace your traditional checking and savings accounts while earning you competitive interest on your entire balance and offering a higher limit on FDIC insurance coverage. If you’d like to streamline your finances, a CMA might help you simplify, especially if you are an active investor.
Finding a CMA online is easy, but investigate multiple options to find the one that’s right for you. Ultimately, however, you may also decide that conventional checking and savings accounts—and the banking relationship that goes with them—are a better fit for you.
For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you find the best solutions for your financial needs.
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