CMAs combine both short-term investing and day-to-day banking. They allow you to access your money, pay bills, manage your savings, and earn interest. These accounts are typically separate from a brokerage firm’s investment accounts, but the accounts can be linked together.
Acronym: CMA
How Does a Cash Management Account Work?
Your money earns money through automatic low-risk investing when you put it in a cash management account while allowing you to access it for your daily spending. Most cash management accounts come with a debit card, a book of checks, and online bill pay services, allowing them to function similarly to traditional checking accounts. They also pay more interest than most savings accounts. Many cash management accounts offer features similar to those provided in checking accounts, such as:
ATM rebatesMobile depositsBanking alertsCashback on purchases
Do I Need a Cash Management Account?
A cash management account isn’t a necessary part of managing your money, but it can help you grow your assets. It performs many of the same functions as other bank accounts. You can store and access money in a checking or money market account. You can earn interest in a high-yield savings or CD account. Opening a cash management account may not be the best way to manage and grow your money if you don’t already work with a brokerage firm. Still, it keeps your cash accessible and flexible while also taking advantage of low-risk growth. If you decide to open a cash management account, look for one that offers:
Linked accounts: You’ll probably need other accounts, such as an online bank account or a local bank for your CDs or safe deposit box, or to earn a higher annual percentage yield. Look for a CMA that allows you to link accounts to make them easy to access. FDIC insurance: Cash management account providers automatically “sweep” your unused cash into investments that pay dividends or interest. That maximizes the account’s profitability.
Cash Management Account vs. Checking Account
Cash management accounts are valuable tools for money management, but they’re not bank accounts per se. Knowing the differences between a CMA and a traditional checking account can help you understand which choice is better for you.
Pros Explained
Simplifies banking: A cash management account allows you to use one financial institution for both your saving and investing needs. That means only one login to keep track of, fewer statements and tax forms each year, and fast transfers to and from your investment accounts.Automatically maximizes cash management: Your money is put to work automatically to maximize profitability.Easy to set up and protect: Opening a cash management account is generally a straightforward process that can be done online, especially if you already have an account with that financial firm. The money that’s in savings is FDIC-insured.Many features associated with traditional banks: You can get ATM rebates, mobile deposits, a free debit card, checks, and many other features that you’d find at a regular bank.
Cons Explained
Monthly fees: Some CMAs have monthly fees or minimum balances that you must meet. There can also be fees for transferring money from your CMA to another bank account or closing your account.Miss out on more profitable investments: Investments associated with cash management accounts are generally low risk, but that also means that they have lower yields. Keeping money in this type of account means not making higher-yielding investments.Potential errors: Your money is moved around between financial institutions and accounts, so it’s exposed to potential processing errors.Higher interest elsewhere: A CMA generally earns more interest than a standard checking or savings account, but many high-yield checking accounts or those offered by online banks can earn more interest.Uninsured investments: The investments that CMAs use are usually low risk, but that doesn’t mean they’re risk-free. Investments such as money market funds are not FDIC-insured, which means you can lose money and be unable to recover it.
