A cash management account is a type of financial account that combines many of the features of checking, savings, and investment accounts into one product.
You get the safety and interest-earning capability of a savings account, the flexibility of a checking account, and the ability to buy and sell securities with an investment account.
Cash management accounts are typically offered by nonbank financial companies, such as brokerage companies. Although each cash management account will differ in its specific terms and features, they share a number of characteristics.
How Do Cash Management Accounts Work?
Cash management accounts combine many of the features of different financial accounts, so it can be hard to understand exactly how they operate.
Store & Protect Large Amounts of Cash
Cash management accounts are designed for people who have a lot of cash to deposit. Like a savings account, they help you keep your money in one place and keep it safe.
The way that cash management accounts do this is through Federal Deposit Insurance Corporation (FDIC) insurance. The FDIC offers up to $250,000 per depositor, per account type, at covered banks. That means if your bank fails and is unable to return your money, the FDIC will reimburse you for up to $250,000 in lost money.
Cash management accounts often have much higher insurance limits, sometimes in excess of $1 million.
Use Your Money When You Need It
Cash management accounts also give you the flexibility of a checking account. Most offer checkbooks or debit cards you can use to make payments or withdrawals from your cash management account.
Depending on the account provider you choose, you may be able to completely replace a checking account with a cash management account. If you get a debit card, checkbook, and the option to make bill payments using your account funds, you’re covered for all of your checking account needs.
Earn Interest
Cash management accounts are able to pay interest like savings accounts do. Most offer interest rates on par with the best savings accounts in the market.
Cash management accounts pay these high rates because they are mostly offered by online financial companies. By avoiding the need to operate physical locations, online companies save a lot of money on overhead costs. That lets them pass more interest on to their customers.
Low Fees
Another benefit of cash management accounts being offered by online financial companies is they have lower fees than traditional bank accounts do. Many have no monthly maintenance fees at all, leaving you free to worry about using your money instead of fees.
Invest Your Funds
Many cash management accounts are offered by investment companies or brokerages. Although they’re usually separate from your brokerage account, it’s easy to link the two accounts. In some cases, there is no separation.
You can submit purchase orders for investments and have the funds deducted from your cash management account. Similarly, proceeds from any sales you make get deposited directly to the account.
This makes your cash management account the hub of your financial life and keeps managing your money easy. You’ll have just one account to monitor with all of your income and expenses flowing through it.
How Does a Cash Management Account Differ From a Checking or Savings Account?
Cash management accounts are neither checking nor savings accounts. They work like a mix of the two, offering the interest of a savings account with the flexibility of a checking account. For day-to-day use, you won’t notice much difference between a cash management account and a traditional bank account.
The big difference is behind the scenes. The company that offers your cash management account opens checking or savings accounts on your behalf at its partner banks. It then handles the management of these accounts for you, moving money in and out of those accounts as needed.
Essential Features of a Cash Management Account
If you’re thinking about opening a cash management account, these are the factors you should compare when looking at your options.
Ease of Access
Cash management accounts are meant to give you the flexibility of a checking account. That means it should be easy to access your money when you need it.
Look for accounts that make it easy to use your money. That includes providing a checkbook, debit card, and online bill payment.
For accounts that offer a debit card, don’t forget to look at the restrictions. Some cash management accounts limit the amount you can withdraw in a day.
You’ll also want to make sure the debit card works on the ATM network you prefer. Some cash management accounts reimburse ATM fees, leaving you free to use any ATM you come across.
Fees
With any financial account, you should keep an eye on the fees you’ll have to pay. There’s no reason to pay a fee when you don’t have to.
Before opening a cash management account, check to see if it has any monthly maintenance fees or minimum balances. Also take a moment to look for other fees might wind up paying, such out-of-network ATM fees.
Interest Rates
Cash management accounts are able to pay interest rates on par with the best savings accounts on the market, but that doesn’t mean they all pay the same rate. Compare the interest rates each account offers. Some will vary with your account balance, while others will be the same regardless of how much you deposit.
If it doesn’t cost you anything and you won’t lose any features that you need, opt for the account with the higher interest rate.
FDIC Insurance Limits
Cash management accounts let you protect your money by splitting your balance among multiple banks. This gives you more than the standard $250,000 insurance offered by the FDIC.
If you have a large balance to deposit to your cash management account, check to see how much of it will be insured by the accounts you’re considering. Some cash management accounts offer more protection than others.
If you’re worried about keeping large sums of cash, look for an account that offers enough insurance to protect your full balance.
Pros of Cash Management Accounts
There are a few reasons you should consider opening a cash management account.
- They Make Money Management Simple. With a cash management account, you don’t need a checking or savings account. Many cash management accounts also link to your brokerage account. That makes it easy to keep all of your money in one place for easy management.
- They Provide Protection. Cash management accounts keep your money safe with FDIC insurance, which is something investment accounts and money market funds cannot do.
- They Have Higher Interest Rates Than Checking Accounts. You’ll earn more interest than you would from a checking account while maintaining the same level of flexibility with your funds.
Cons of Cash Management Accounts
Cash management accounts aren’t without their flaws, and you should be aware of them before opening one.
- They Don’t Offer the Best Returns. Many investments, such as stocks, bonds, and mutual funds. offer great returns. There are also certificates of deposit (CDs) and some savings accounts that offer better rates than cash management accounts.
- Face-to-Face Customer Service Might Not Be Available. Most cash management accounts are offered by online financial companies. If you need help, you have to call customer support or participate in an online chat. This can be difficult for people who prefer getting help in person or for complicated situations.
- You Might Not Get All of the Features You Need. Cash management accounts are meant to combine the features of checking and savings accounts, but some cannot fully replace those dedicated accounts. For example, you might not have the option to make online bill payments from a cash management account, even though that’s a standard feature of checking accounts.
Who Needs a Cash Management Account?
Cash management accounts are a good choice for a few different groups of people.
The first group is people who have a large amount of cash they want to keep liquid but protected. If you have a few hundred thousand dollars you need to have easy access to, you don’t want to tie it up in investments. You also don’t want it sitting in a checking account, slowly losing value to inflation.
And if you exceed the $250,000 FDIC insurance limit, you’ll have to split it between multiple banks if you want all of your money to be insured.
Cash management accounts let you earn a reasonable rate of interest on your cash while maintaining its FDIC protection. You also don’t have to worry about splitting your money between multiple banks.
Cash management accounts are also great for people who want simplicity. All your money is in one place. You don’t have to maintain a separate checking and savings account. If you get your cash management account from the same company you use for your brokerage account, you can keep all of your finances in one place.
Anyone who likes online banking can make good use of a cash management account. If you’re already accustomed to doing your banking through a computer or phone rather than in-person, you’re ready to start using a cash management account.
Where Can I Get a Cash Management Account?
You can get a cash management account from a number of companies.
The first place you should look is your brokerage company. Why not keep all of your money in one place? Many financial firms offer cash management accounts, and your brokerage may even offer perks for customers who maintain a large balance, so using your brokerage for your cash management needs can help you reach balance thresholds.
If your brokerage doesn’t offer a cash management account, you have plenty of alternatives. Many robo-advisors and online investing platforms offer cash management accounts.
For example, Robinhood offers a cash management account you can link to your brokerage account.
Alternatives to a Cash Management Account
If you don’t think a cash management account is right for you, you have other options.
If you’re considering a cash management account because you want to combine the features of a checking and savings account, a money market account can help you do that.
Most banks offer money market accounts, which provide the interest rates of a savings account with the check-writing capabilities of a checking account.
The downside is your ability to make withdrawals from the account is limited to six transactions per month. Money market accounts also have higher fees and minimums than cash management accounts.
If you want a cash management account for the safety and returns they offer, you can open a CD. CDs pay more interest than savings accounts and are fully insured by the FDIC up to the $250,000 limit.
The only drawback is you have to commit your deposit to the account for a set period of time. If you make an early withdrawal, you have to pay a fee.
If returns are your primary concern, you should open an investment account instead. You won’t have the safety of FDIC insurance, but you can earn far more money by investing your cash in stocks, bonds, or mutual funds.
Final Word
Cash management accounts offer safety, simplicity, and a solid return on your cash. They’re a great choice for anyone who wants to make managing their money easier, but they don’t have all of the features of dedicated checking and savings accounts.
If you’re looking to store and protect a large sum of cash, whether in anticipation of putting a down payment on a home or keeping it as an emergency fund, a cash management account could be a great option that provides you with the best features of checking, savings, and investment accounts all in one place.
