What is a cash management account?

Are you tired of juggling multiple accounts to handle your everyday banking needs and longer-term investments? A cash management account, also known as a CMA account, could be the streamlined solution you're looking for.

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A cash management account is a cash account that combines the features of a traditional checking account and a savings or investment account into one convenient package. Typically offered by non-bank financial service providers like robo-advisors and brokerage firms, these versatile accounts aim to be an all-in-one option for handling your cash.

What is the purpose of a cash management account?

The primary purpose of a cash management account is to provide a more efficient way to manage your money by combining various financial services into a single account. CMAs offer the convenience of a checking account for daily transactions, the higher interest rates of a savings account, and the potential investment returns of a brokerage account.

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With a cash management account, you can deposit your paycheck, pay bills, make purchases with a debit card or checks, and earn interest on your balance, all from one centralized account. Many CMAs also offer features like ATM access, mobile banking, and FDIC insurance, often with much higher coverage than traditional bank accounts.

How do cash management accounts work?

When you open a CMA account, you'll fund it much like a regular checking account through direct deposit, mobile check deposit, electronic transfers, and other standard methods. This serves as your primary account for handling incoming and outgoing money.

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One of the key features of a cash management account is what happens to your money once it's in the account. Many CMAs automatically transfer or "sweep" any balance over a certain threshold into an investment vehicle, typically a low-risk option like a money market mutual fund. This allows your excess cash to consistently earn a return without requiring constant monitoring and manual transfers on your part. When you need to access those funds, they remain liquid and easily accessible.

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Additionally, many CMAs offer overdraft protection. If a large expense causes your balance to dip below zero, the account will automatically pull from your linked investment funds to cover the shortage, helping you avoid costly overdraft fees.

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In terms of everyday banking capabilities, cash management accounts generally provide features like online and mobile account access, bill pay, money transfers, debit cards and/or checkwriting, and ATM access (often with rebates for any fees incurred). The financial institutions offering CMAs partner with chartered banks to provide these traditional services and FDIC insurance, frequently with much higher coverage limits compared to standard bank accounts.

What are the benefits of a cash management account?

Cash management accounts offer several compelling advantages for consumers looking to optimize their money management:

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1. Streamlined finances: CMAs allow you to handle checking, saving, and investing from a single account, simplifying your financial life and reducing the need to manage multiple accounts across different institutions. This streamlined approach can save you time and effort in tracking your money.
2. Higher interest rates: Cash management accounts typically offer higher interest rates compared to traditional checking and savings accounts, helping your money grow faster. These higher rates can help you maximize your earnings on idle cash.
3. Automatic investing: Many CMAs sweep excess cash into low-risk investment vehicles like money market funds, keeping your money productive without requiring constant attention. This automated investing feature can help you put your money to work without the need for manual intervention.
4. Extensive ATM access: Most cash management accounts provide access to a wide network of ATMs, often with fee reimbursements, making it convenient to withdraw cash when needed. This extensive ATM access ensures that you can easily access your money wherever you are.
5. Enhanced FDIC insurance: CMAs frequently offer FDIC insurance coverage well beyond the standard $250,000 limit (by working with partner banks), providing added peace of mind for your deposits. This enhanced insurance can be particularly beneficial for those with larger cash balances.

What are the drawbacks of a cash management account?

While cash management accounts have many benefits, there are some potential downsides to consider:

1. High minimum deposits: Some CMAs require a substantial minimum deposit to open an account, which may be a barrier for those just starting to save and invest. These higher minimum requirements can make it challenging for some individuals to access the benefits of a CMA.
2. Limited physical branches: Many CMA providers operate primarily online and may not have an extensive network of physical branches for in-person banking needs. This limitation can be inconvenient for those who prefer face-to-face interactions or need to handle complex transactions in person.
3. Variable rates and fees: Interest rates and fee structures can vary significantly between CMA providers, requiring careful comparison shopping to find the best fit. These variable rates and fees can make it challenging to compare options and find the most advantageous account for your needs.

How do cash management accounts compare to other accounts?

When evaluating whether a cash management account is right for you, it's helpful to understand how they stack up against other common financial account types.

CMAs vs. Traditional checking accounts

Cash management accounts generally offer higher interest rates and returns on excess funds compared to traditional checking accounts. Both account types typically provide essential features like bill pay, spending tools, debit cards, and ATM access. However, checking accounts may offer more extensive branch access, while CMAs prioritize a robust digital experience. Additionally, CMAs may have higher minimum opening requirements compared to many checking accounts.

CMAs vs. High-yield savings accounts

Interest rates offered by CMAs can be comparable to high-yield savings accounts. However, CMAs provide additional checking features like bill pay, debit cards, and check writing that most savings accounts do not offer. Savings accounts, on the other hand, can serve as a dedicated bucket for goal-oriented saving. CMAs often have higher FDIC/SIPC insurance limits compared to savings accounts.

CMAs vs. Money market accounts

Both cash management accounts and money market accounts generally offer higher interest rates than checking accounts and provide ATM/debit card access. Some money market accounts also offer check-writing capabilities. Investment options may be more diverse with CMAs depending on the institution. Additionally, insurance coverage limits are often higher with CMAs compared to money market accounts.

How to choose a cash management account

When selecting a cash management account, it's essential to consider your specific financial needs and priorities. Here are some key factors to evaluate:

• Fees and minimum requirements: Compare the fees and minimum balance requirements associated with different CMA providers. Look for accounts that align with your financial situation and offer competitive fee structures.
• Interest rates: Evaluate the interest rates offered by various CMAs and consider how they compare to other high-yield account options. Keep in mind that rates can fluctuate over time.
• ATM access and fees: If you frequently need to withdraw cash, look for a CMA with a wide network of ATMs and fee reimbursements to minimize costs.
• Insurance coverage: Verify the level of FDIC or SIPC insurance provided by the CMA provider, especially if you plan to maintain a high cash balance.
• Investment options: If you're interested in leveraging the investment features of a CMA, review the types of investment vehicles offered and ensure they align with your goals and risk tolerance.
• Integration with other financial tools: Consider how easily the CMA integrates with your existing financial management tools, such as budgeting apps or accounting software.
• Customer support: Evaluate the quality and accessibility of customer support offered by the CMA provider, particularly if you anticipate needing assistance with account management or technical issues.
• User reviews and ratings: Read user reviews and ratings to gauge the experiences of other customers with the CMA provider, paying attention to factors like ease of use, responsiveness, and overall satisfaction.
• Security features: Assess the security measures implemented by the CMA provider to protect your financial information and prevent unauthorized access to your account.

By carefully weighing these factors and comparing the features and benefits of different cash management accounts, you can find the most suitable option for your unique financial situation and goals.

Is a cash management account right for you?

Ultimately, whether a cash management account is the right choice depends on your unique financial situation and priorities. 

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A CMA may be a good fit if you:

• Prefer a centralized account for daily banking and investing
• Tend to maintain a high cash balance in checking or low-yield accounts
• Want to maximize your return on idle funds
• Value a seamless digital banking experience
• Desire higher FDIC coverage for your deposits
• Are comfortable conducting most banking activities online or through a mobile app

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Conversely, a CMA may not be the ideal solution if you:

• Heavily rely on in-person banking services and local branch access
• Frequently need to deposit physical cash
• Prefer to keep different types of accounts strictly separated
• Seek a wide variety of specialized investment options beyond cash equivalents

Ramp: A modern solution for business cash management

For businesses seeking a powerful cash management solution, Ramp offers a comprehensive spend management platform that goes beyond the capabilities of traditional CMAs. With Ramp, companies can access a robust suite of financial tools, including corporate cards, expense management, bill pay, accounting integrations, and more.

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The platform enables automation of expense policies, streamlined financial reporting, and real-time visibility into spending patterns. This empowers businesses to make data-driven decisions and optimize cash flows. Moreover, Ramp allows an average savings of 5% through reduced time and money expenditure.

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By leveraging Ramp's innovative features and insights, businesses can simplify their financial operations, reduce manual tasks, and focus on strategic initiatives that drive growth and profitability.