One of the biggest attractions of a cash management account is that the Federal Deposit Insurance Corporation (FDIC) can protect up to $2 million, instead of the usual $250,000.
We’ve talked so much about having multiple bank accounts, especially having a checking account and a high-yield savings account, to better manage your money. Few people know that they can have the best of both worlds in one place: a cash management account.
What is a cash management account?
A cash management account, also known as a cash management account or CMA, has the flexibility to hold your money, use it as you would with a checking account and generate a return, just as you would with a high-yield savings account. In fact, some of these accounts carry above-average interest.
These accounts are often offered by non-bank financial institutions, such as brokerage firms and robo-advisors, to provide an alternative to conventional banking services. Cash management accounts help customers keep large sums of money safe and easily accessible, while paying some interest.
How does a cash management account work?
Simply put, a cash management account allows the owner to manage, spend and earn money in one place, without having to divide it into the two typical bank accounts: a checking account and a high-yield savings account.
Speaking on the technical side, cash management accounts keep your money safe and pay interest by dividing your deposit into several accounts at different banks. For example, if you deposit $1 million in a cash management account, the brokerage firm could place $200,000 in accounts at five different banks.
This financial product allows convenience for the benefit of the client, who will have his money in one financial institution instead of several. This results in fewer bank statements and tax forms each year.
You can transfer funds instantly between the savings and checking portions of your cash management account, so you can use your deposits whenever you need them without additional hassle.
Most CMAs also come with a debit card so you can easily access your money and use it for any purchase. Many also offer refunds every time you receive an ATM fee.
Some cash management accounts generate an annual percentage yield (APY) 11 times higher than the interest on traditional bank accounts. You can also earn cash back rewards on your purchases, up to 10%.
Because of its features, one of the biggest advantages of a cash management account is that your money is protected by the Federal Deposit Insurance Corporation (FDIC), where you can even find security options of up to $2 million per depositor, instead of the $250,000 that the FDIC usually protects bank accounts in the United States.
You also have a second protection for funds that may be guaranteed by the Securities Investor Protection Corporation (SIPC).
What are the disadvantages of a cash management account?
The returns may not be as attractive as they would be with certain high-yield savings accounts. You may even be able to generate a rate below inflation, so your money will lag behind over time.
Most institutions that offer these types of accounts are online financial institutions. That can also be an adverse aspect for some consumers.
Some companies that offer cash management accounts charge monthly fees or require high minimum balances. Be sure to research the terms and fee structure before committing to an account.
How do I open a cash management account?
Because most financial institutions that offer a cash management account are online, that makes opening one relatively simple, using a computer or mobile device.
The process usually involves a simple online form that takes a few minutes to fill out to open a cash management account.
Once you’ve signed up, you’ll usually be emailed an electronic copy of your debit card so you can start using it right away, even before your physical card arrives in the mail.