Actions have consequences. Staying up too late will turn you into a zombie at work the next morning, eating ice cream for breakfast will force you to buy new jeans — and placing your money in a conventional checking or savings account could yield a piddling amount of interest.
The internet hasn’t found a way to circumvent the biological necessities of sleep and a healthy diet — yet — but it can empower banks and financial institutions to offer accounts with high APYs, all while providing the ease-of-access and convenience of a checking account. In the evolving world of online banking, these are usually called cash management accounts, and you need to know more about them.
You may have read about cash management accounts. They go by a variety of names: hybrid checking, hybrid accounts, cash management vehicles. Like many consumer financial products, readers may be a bit unclear about how these accounts actually work — and to start, note that they are very different than the “cash management accounts” offered by certain online stock brokerages.
“We’re trying not to think like traditional bankers, with the usual boundaries of how an account should be used,” said David Hijirida, CEO of Simple, which offers its own cash management account. “What we’ve found is that most customers use our accounts in a way that combines both checking and savings behaviors.”
Let’s get to the heart of the matter by defining what these new accounts are and whether they’re right for you and your money.
What is a cash management account?
Whatever the name, a cash management account combines the high yield of a savings account or certificate of deposit with the accessibility of a checking account.
With some of the accounts reviewed below — like Aspiration’s Spend and Save and Simple’s Checking and Protected Goals Accounts — the product actually consists of a checking account (which typically earns little to no interest) linked with a savings account (which earns a pretty decent APY) and features instantaneous, unlimited transactions between the two. Others — like Radius’ Hybrid Checking — comprise a single checking account earning a high APY, minus all the usual requirements typical of a traditional high-yield checking account.
While cash management accounts consisting of both a checking and savings account earn some of the highest APYs, you need to watch out that you don’t keep the majority of your funds in the checking or spending portion — where it earns minimal interest. Because transferring funds between the checking and saving portions happens instantly and doesn’t come with any limits, this is an easy mistake to avoid.
The boundary between “cash management account” and “high-yield checking” account can be hazy, but they share the following characteristics that place them in the “cash management” category.
- Zero fees: One of the more attractive facets of cash management accounts is that most have no monthly maintenance fees (or only charge a small amount). This helps differentiate them from high-yield checking accounts, many of which require users to meet multiple specific requirements each month or pay maintenance fees in order to earn the high APY.
- A higher APY than your typical checking account: According to DepositAccounts.com (like MagnifyMoney, it too is owned by LendingTree), the average APY a checking account earns is 0.133%. Traditionally that’s been seen as the trade off depositors make with banks in order to have easy, everyday access to their funds. The cash management accounts we review here represent true hybrid accounts that combine the liquidity of checking accounts with the high interest rates of savings accounts. All of them offer a much higher APY than the average checking account and, in many cases, higher than the interest earned in many savings accounts.
- They’re online accounts, mostly: The institutions offering cash management accounts mostly exist as ones and zeros on the web. Some of these companies, like Aspiration, aren’t even banks themselves, but have partnered with traditional banks to provide customers with their services.
How do cash management accounts earn so much interest?
While the particulars vary from account to account, the principal underlying cash management account combines a traditional checking and savings account in one instrument — you deposit money with a bank or institution, where it earns interest. The financial institution then takes a cut of that interest in order to make money, and passes the rest on to you (which is reflected in the interest that particular account earns).
Because banks prefer customers to deposit as much money as possible for an extended period, they usually give accounts and products that limit customers’ ability to withdraw their cash higher interest rates in order to incentivize depositors into using those products.
|Average Checking Account APY||Average Savings Account APY||Average 1 Year CD|
|Average 5 Year CD|
As you can see from the chart above — this data comes from DepositAccounts.com — the more liquid your account, the less interest it earns for you. Checking accounts, which provide almost unlimited access to your money, earn the lowest APY on average. Certificates of deposit with a five-year term, which usually come with a steep financial penalty if you withdraw the money before the term is up, provide the highest interest, on average.
So how do the companies offering cash management accounts bypass this norm to offer customers high interest rates on accounts with little to no restrictions on withdrawals? A big part of the answer is their low overhead, thanks to their online-only operations.
Megabanks like Chase employ thousands and maintain a sprawling network of physical locations, while an online-only institution like Aspiration, offering the Spend and Save cash management account, might have only a few dozen employees on its payroll.
“Because we’re online-only, it helps us pass on those kinds of savings to our customers,” said Andrei Cherny, CEO of Aspiration.
Where does my money go when I deposit it into a cash management account?
Since many of the institutions offering cash management accounts lack the extensive infrastructure of traditional banks, you may be wondering where your money is actually deposited with these accounts.
The answer is that they partner with a bank (or a series of banks) to manage your funds. At the end of the business day, the money in your cash management account is swept into one of these participating bank’s accounts, where it enjoys the normal protections provided by FDIC accounts.
This information should all be disclosed to you when you open a cash management account, and if it’s not you should hesitate before placing a large amount of money in the account.
“As with anything, read the fine print,” said Jonathan Chapman, CFP at WJ Interests based in Sugar Land, Texas. “Look under the hood to see what banks they partner with to ensure they are working with quality institutions.”
Customers should also keep an eye on the individual FDIC-insured accounts where your money is swept at the end of the day. Make sure none of the balances exceed the insurance’s limit ($250,000) — otherwise, the portion of your balance that’s greater than $250,000 is at risk of being uninsured.
The potential pitfalls of cash management accounts
The high interest rates offered by these accounts make them attractive to customers who want their money to grow at a decent rate while still remaining accessible, but they’re not for everyone. Because most of these hybrid accounts are offered by online-only banks or institutions, customers have to feel comfortable banking with a company that may lack decades of history — especially if they’re already accustomed to doing business with another bank.
“As an advisor, my most difficult work is to get people to follow through on my recommendations,” said Jayson Owens, CFP at Bright Road Wealth Management based out of Anchorage, Alaska. “To accomplish this, I rarely recommend changes to a primary checking account. The cost in time typically outweighs the benefit of the change.”
Another related concern customers may have about these cash management accounts is if the companies offering them will stick around for the long haul. “Clients may not lose money but the company may get acquired or shuts down which would cause unnecessary hardship,” said
Deva Panambur, CFA and CFP at Sarsi, a wealth management company based in West New York, N.J.
While you’re not going to be able to waltz into the CEO’s office and demand a look at his five-year plan, you should take into account your gut reaction to how a company offering a cash management account presents itself and whether it has a viable shot at longevity.
The best cash management accounts
|Account name||APY earned||Minimum balance||Monthly Maintenance Fee|
|Betterment Cash Reserve ||0.40%||$0||$0|
|Wealthfront Cash Account*||0.35% APY on the entire balance||$1||$0|
|SoFi Money||0.25% APY on the entire balance||$1||$0|
|Radius Rewards Checking Account||0.15% APY on balances of $100,000 and greater; 0.10% APY on balances between $2,500 and $99,999.99||$100,000 to earn the highest APY; $2,500 to earn 0.10% APY||$0|
|Aspiration Spend and Save||Up to 0.00% APY on balances up to $10,000; 0.10% on balances over $10,000||$1,000 spent monthly on debit card to earn 0.00% APY or rate drops to 0.10% ||$0|
*These cash management accounts currently don’t have a way for you to spend money directly from the account (such as a debit card or check) and require you to transfer money from the cash account to a third-party account before spending.
Simple was created out of frustration with the banking industry. According to the founders, they were confounded by the complexities of certain bank accounts; their solution was to offer a no fee bank account that earns interest and helps you budget your money “in one simple app.”
What makes this bank account stand apart from other online checking accounts? Well, for starters, it’s a checking account that doesn’t have any fees, not even if you use an international ATM (however, a fee may still be charged by the ATM owner). With this cash management account, you can earn 0.80% APY on all balances in your Protected Goals account, which is basically a savings account that lives within your larger Simple account, where you can instantly transfer money in and out of as many times as you want without any penalty.
Betterment Cash Reserve
Betterment’s Cash Reserve account promises an APY of 0.40%. You can also opt to open a checking account, which they offer through a partnership with nbkc bank.
Because money in the Cash Reserve account is held by several program banks, customers enjoy FDIC protection up to $1 million. There’s no limit to the amount of times you can transfer money in and out of your Cash Reserve account (unlike a traditional savings account at a bank) but it does take 1-2 business days to for Betterment to process these transfers.
Wealthfront Cash Account
This robo-advisor offers savers a cash management account that earns 0.35% APY and doesn’t require you to open an investment account. Because Wealthfront sweeps the money you deposit in the cash account into several partner bank accounts, your money is FDIC insured up to $1 million, a selling point for those wanting large balances to receive the maximum protection. Wealthfront will soon be rolling out a checking account and debit card feature to allow you to directly spend the money with a merchant Meanwhile, you can transfer funds from the cash account to a third-party account or an internal Wealthfront investment account free of charge.
Though it’s probably better known for its mortgages and student loans, this online-only investment firm has staked a claim in consumer banking by offering its Money account, which offers a 0.25% APY. SoFi doesn’t require depositors to maintain a minimum balance in this account in order to earn that interest rate, but you will need $500 in monthly deposits; otherwise, that rate drops to 0.01%. Account holders also get additional goodies like fee-free Allpoint ATMs worldwide.
Radius Rewards Checking Account
Radius Bank is a community bank headquartered in Boston. The Radius Rewards Checking account is free, as long as you open the account with the required deposit of $100. Because the Rewards account offers their interest rate for a checking account without saddling the customer with a laundry list of requirements — like a number of debit transactions required each month — Radius’s account joins the list of best cash management accounts. You’ll also score unlimited ATM fee reimbursements, and if you sign up for direct deposit, you can access your money up to two days sooner.
Aspiration Spend and Save Account
Aspiration aims to transform personal banking from a chore customers tolerate to an act of social responsibility — at least according to their marketing campaign, which heavily emphasizes the fact that customers only pay whatever they wish in fees, with 10 percent of that money going to charity. But even depositors who don’t buy into Aspiration’s brand ethos will likely find themselves intrigued by the company’s Spend and Save Plus, which promises a 0.00% APY on what is effectively a checking account.
Similar to Simple, Aspiration has packaged together a savings account and a checking account into a single consumer product allowing users to move their money between both portions instantly and as many times as they wish. Users should be careful not to leave the majority of their funds in the checking portion, which owns zero APY. Instead most of the money should live in the savings account, where it can earn the 0.00% APY the company advertises so prominently. To get that APY, you’ll need to upgrade from the base account to Aspiration Plus for a monthly fee of $3.99. You’ll also need to make at least $1,000 in purchases on the debit card per month or the rate drops to 0.25%. And balances over $10,000 earn 0.10%. But with Plus you get a few extra perks. You’ll earn more cash back on your socially conscious purchases, get one foreign ATM fee refunded per month, and be eligible for their Planet Protection program, which aims to offset the carbon footprint you leave by gassing up your car. Again, you can move your money between both parts of the Spend and Save account instantly, so having most of it in the savings portion shouldn’t slow you down during a shopping spree; however, it’s important to note in case you get careless and leave a big chunk of change in the spending portion, where it earns no interest.