How to Leverage a Cash Management Account to Reach Financial Goals
Cash management accounts streamline investing while earning interest, but they’re not right for everybody.
Contributing Writer at Tally
November 4, 2021
When considering a new bank account, there are many options to pick from. One option is a cash management account. These accounts intertwine your investment accounts with your checking account, making it easy to move money around.
Is a cash management account right for you? If so, how can you determine which cash management account fits your situation?
We cover all that and more below.
What is a cash management account?
A cash management account (CMA) is a bank account offered through a non-banking financial institution, such as a mobile stock-trading app, online investment firm or robo-advisor.
Not only are these accounts holding spots for uninvested cash, but CMAs also offer services similar to a traditional checking and savings account.
Account holders can easily switch between their bank account and investment accounts without changing apps. They can also seamlessly transfer money from their brokerage account to their bank account.
Often, CMAs include all the conveniences of a traditional checking account, including a debit card and checkbook. They can offer these services because they partner with banks.
So, if you deposit cash into a CMA, the CMA doesn't hold that cash. Instead, a member FDIC bank or several banks hold the cash. However, on the app or through online banking, the money appears in the CMA.
How does a CMA stack up to a traditional checking account?
Because they’re an alternative to a traditional checking account, you're likely wondering how a CMA stacks up. Where is a CMA superior? Where’s it inferior?
While there are interest-bearing checking accounts, they generally have very low annual percentage yields (APYs). The national average interest yield on interest checking accounts is 0.03%, according to the FDIC. CMAs, on the other hand, generally range from 0.10% to upward of 5% APY.
Convenient features like:
Check writing capability
Online bill pay
and more draw people to checking accounts. A large portion of CMAs offer all the same features as a checking account because the cash you deposit goes into a linked checking account at a partner bank.
Quick access to investment capital
One advantage a CMA has over the typical checking account is how easy it is to move money around for investing.
The CMA links directly to your investment account, so you can instantly transfer cash to buy stocks, bonds, mutual funds and more. For fast-moving investors, this is a must-have.
With a traditional checking account, you may have to wait a day or longer for your funds to make it to the investment account.
Non-bank financial institutions generally profit from investment fees and other wealth-building tools, so they typically don’t charge fees for their CMAs. High-yield checking accounts, however, frequently come with monthly maintenance fees and other charges.
What are the benefits of a CMA?
One of the biggest benefits of a CMA is it combines your cash account with your investment account. This means you can easily shift money between the two accounts. For example, if you receive a tip from your broker to buy a stock quickly, you can move money to your investment account in minutes and buy the stock before the price rises.
Unlike a traditional brokerage account, many CMAs allow you access to liquid capital through check writing or a debit card. Many also offer access to a network of free ATMs, saving you a few dollars every time you need to make withdrawals.
For those that don't offer free ATM access, many offer a set number of ATM fee reimbursements per month.
Higher interest rates
CMA's typically offer in the range of 0.10 to 5% APY, depending on your account balance and the financial institution. This is significantly higher than the national average for interest checking accounts at most traditional banks, 0.03% as of October 2021.
Mobile apps and online banking
CMAs typically have advanced mobile apps and online banking sites. You can perform a wide range of actions, like pay bills, transfer cash, set automatic transfers, set up direct deposit, make mobile check deposits and more.
Low or no account fees
Financial institutions offering CMAs generally make their money on investment fees, like transaction fees and commissions. This allows them to offer the convenience of a CMA with little to no monthly fees.
What are the drawbacks of a CMA?
There are lots of benefits to a CMA, but there are also some drawbacks to them. Here are some of the more significant disadvantages to consider.
Better rates on high-yield savings accounts
While not always the case, you may be able to get higher APY from a high-yield savings account (HYSA). So, if you don’t need the convenience of an attached investment account, a HYSA may be a better option.
High minimum balance requirements
Some CMAs may have high minimum cash balance requirements to get their best interest rates. While the high APY may look great when you see it in advertisements, always read the fine print to determine if you must carry a high balance to receive it.
If there is a minimum balance requirement you can’t meet, you may end up with a significantly lower APY.
No local branches or customer support
If you run into an issue with your account and need customer service, many banks offering high-interest CMAs have no local branches. You must call their customer support or chat with them online for assistance with your account or other financial services.
What should you look for in a CMA?
Annual percentage yield
The APY is an important factor when considering a CMA. With a high APY, even your cash reserves — the cash you haven't invested in your brokerage account — will grow. This gives you the flexibility to hold off on investing cash without losing all the potential interest.
Many CMAs don’t have minimum requirements to get the top-level APY. However, some financial institutions require a minimum balance to earn the highest APY. Others may have other minimum requirements, including direct deposit or a minimum number of monthly transactions to get the best APY.
Be sure to verify you can meet these minimums before committing to any financial institution.
Typically, the financial institutions that offer CMAs make their money from the investments and other financial services they sell. This often leads to most CMAs having no monthly fees. However, some still charge maintenance fees, especially if you fall below a certain average balance threshold. Be sure to check the terms for these fees.
Also, look out for other fees that almost all cash accounts charge, like overdraft fees, foreign transaction fees, ATM fees and others. While these fees are normal, consider the ones you expect to run into the most and compare them to other CMAs’ fees.
While non-bank financial institutions themselves won't have FDIC insurance, the partner banks they work with should. You can verify FDIC membership in the terms and conditions. The FDIC coverage should be $250,000 for each partner bank it works with.
One of the biggest reasons for using a CMA is its investment products and services. Check out what types of products it offers, such as individual stocks, mutual funds and others, and ensure this is what you're looking for. Also, check for other services, like access to an investment or financial advisor, which are added perks some CMAs may not offer.
Cash management account: Balancing banking and investing
A cash management account may not be for everyone, as some people may prefer to keep their cash separated from their brokerage account. However, a CMA is a great option for those who want the convenience of having an interest-bearing checking account to transfer cash from for trading quickly.
Do your due diligence when comparing CMAs, though. Not all of them are equal. Compare all the key aspects listed above to find the one that fits your personal finances.
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