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 define these accounts and help you determine whether they’re right for you and your money.
With some of the accounts reviewed below — like Aspiration’s Spend and Save — 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 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.
|Account||APY earned||Minimum balance to earn APY||Monthly maintenance fee|
|Betterment Cash Reserve||0.35% on all balances||$0||$0|
|Wealthfront Cash||0.35% APY on the entire balance||$1||$0|
|SoFi Checking and Savings||1.25% APY on all balances with qualifying direct deposits; 0.70% APY on all balances without direct deposit||$1||$0|
|LendingClub Rewards Checking||0.15% APY on balances of $100,000 and greater; 0.10% APY on balances between $2,500 and $99,999.99||$2,500||$0|
|Aspiration Spend and Save||Up to 5.00% APY on balances up to $10,000; 0.10% on balances over $10,000||$1,000 spent monthly on debit card to earn 5.00% APY or rate drops to 0.25%||$5.99 (when billed annually) for Aspiration Plus in order to receive the APY|
Betterment’s Cash Reserve account has an APY of 0.35%. 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 Federal Deposit Insurance Commission (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 for Betterment to process these transfers.
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.
Though it’s probably better known for its mortgages and student loans, this online-only investment firm staked a claim in consumer banking by offering its Money account. SoFi has moved its Money accounts into a new Checking and Savings account, which pays 1.25% APY on all balances as long as a direct deposit is completed each month. Account holders also get additional goodies like fee-free Allpoint ATMs worldwide and early paycheck access.
The LendingClub 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 — LendingClub’s account joins the list of best cash management accounts. You can earn 1.00% cash back on certain purchases as well.
To get the highest APY in this account, you’ll need to upgrade from the base account to Aspiration Plus for a monthly fee of $7.99 (or $5.99 if billed annually). 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%. Those rates apply to Aspiration Plus members.
With Plus you get a few extra perks. You’ll earn more cash back on your socially conscious purchases, get one out-of-network 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.
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 at higher interest rates in order to incentivize depositors into using those products.
|Average Checking Account APY||Average Savings Account APY||Average 1-Year CD APY||Average 5-Year CD APY|
As you can see from the chart above — this data comes from the FDIC — 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.
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 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.