What Is a Cash Management Account?

A cash management account (CMA) is a type of account offered by many financial institutions that combines features of checking, savings, and investment accounts. This kind of account is designed to streamline an individual’s financial operations by providing a “one-stop shop” for multiple banking activities.

The key features of a cash management account include the ability to deposit and withdraw money, write checks, make electronic transfers, and sometimes access automated teller machines (ATMs). Many CMAs also allow you to earn interest on the cash held in the account. In some cases, the interest rates may be higher than those provided by traditional savings accounts.

Cash management accounts often come with additional features like automatic cash sweep (where excess cash is automatically moved into an investment account or money market fund), debit cards, and overdraft protection.

Key Takeaways

• Cash management accounts (CMAs) are versatile and combine features of checking, savings, and sometimes investment accounts, offering convenience and easy access to your money.
• Brokerage accounts are primarily designed for investing in securities such as stocks, bonds, and mutual funds, providing opportunities for potentially higher returns, but with greater risk.
• The choice between a CMA and a brokerage account should align with your personal financial goals, risk tolerance, and banking needs.
• Many people may find it beneficial to have both a CMA for day-to-day money management and a brokerage account for long-term wealth growth.

What Is a Brokerage Account?

A brokerage account is an investment account that an individual opens with a brokerage firm. The primary purpose of this account is to invest money in various financial instruments such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other securities. The money deposited into the brokerage account can be used to buy and sell these investments.

While a brokerage account doesn’t typically provide the same breadth of services as a cash management account, it can offer higher potential returns through investing. And, increasingly, many brokerage firms are incorporating features like check writing and debit cards.

Brokerage accounts are best-suited for those who have some knowledge of the financial markets and are looking to grow their wealth over the long term.

CMA vs. Brokerage Account

Similarities

• Opportunity for growth

• Alternatives to traditional savings

• Flexibility

• Offered by many financial institutions

Differences

• Primary purpose

• Access to funds

• Riskiness

• Account features and extras

Cash Management Account vs. Brokerage Account: Key Similarities

Despite their different primary functions, cash management accounts and brokerage accounts share some similarities. Both accounts:

1. Offer an avenue for wealth growth: CMAs offer interest-bearing features, while brokerage accounts provide opportunities for investment gains.
2. Have potential for higher returns than traditional savings accounts: Brokerage accounts can provide substantial returns through investments, while some CMAs offer competitive interest rates.
3. Flexibility: CMAs’ various features and kinds of account activities make them useful for different banking activities.
4. Are offered by many financial institutions: Both types of accounts are available from a variety of financial institutions, including traditional banks, online banks, and brokerage firms.

Cash Management Account vs. Brokerage Account: Key Differences

While there are similarities between CMAs and brokerage accounts, there are also significant differences:

1. Primary purpose: The primary purpose of a CMA is to manage daily cash flow and offer convenience and liquidity for banking needs, while a brokerage account is designed specifically for investing in financial securities.
2. Access to funds: Funds in a CMA are typically easier to gain access to than those in a brokerage account. Withdrawals often can be made without penalties, unlike the fact that early withdrawal of certain investments in a brokerage account that may incur fees.
3. Risk level: Cash in a CMA generally carries less risk, as it isn’t subject to market fluctuations like investments in a brokerage account are. However, this also means potentially lower returns.
4. Account features: CMAs often come with features like debit cards, check writing, and ATM access, which are usually not offered with brokerage accounts.

Choosing an Account Type

Choosing between a cash management account and a brokerage account depends on your individual financial goals, risk tolerance, and banking needs.

If you’re looking for an account that combines the features of checking, savings, and potentially investment accounts, and you value the convenience of having everything in one place, then a cash management account may be right for you. It’s also a good choice if you prefer easy access to your money and lower risk.

The decision to open a CMA vs. a brokerage account ultimately comes down to your personal financial situation, your goals, and your comfort with risk. It’s always a good idea to speak with a financial advisor or conduct thorough research before making a decision. In either case, both types of accounts can play a role in a balanced financial plan.

On the other hand, if your primary goal is to invest and grow your wealth over the long term, and you’re comfortable with the higher risks associated with investing in the stock market, then a brokerage account could be more suitable.

It’s also worth considering that these two account types are not mutually exclusive. Many individuals may find it beneficial to have a cash management account and a brokerage account. You could use the CMA for day-to-day financial management and saving for short-term goals and use the brokerage account for long-term investing and wealth building.

Do I Need a Large Amount of Money to Open a Cash Management Account or a Brokerage Account?

Not necessarily. Many institutions offer cash management and brokerage accounts with low or no minimum balance requirements. However, certain premium accounts or specific investments within a brokerage account may require a higher minimum. Always check the account details with the specific institution.

Can I Lose Money in a Cash Management Account?

Cash management accounts are generally considered low-risk due to the nature of their features, and the savings portions are often insured by the Federal Deposit Insurance Corp. (FDIC). But if the institution where you hold your CMA goes bankrupt, you could lose money in amounts that exceed FDIC limits.

Can I Use a Brokerage Account Like a Bank Account?

While some brokerage accounts may offer features similar to a bank account, such as check writing or a debit card, they are primarily designed for investing. Unlike bank accounts, the value of your brokerage account can fluctuate based on the performance of your investments.

Which Account Is Better for Saving for Retirement, a Cash Management Account or a Brokerage Account?

While you can save for retirement in either type of account, a brokerage account may be more suitable for this purpose. Brokerage accounts allow for investing in a wider range of securities, which can potentially provide greater returns over the long term. However, it’s also worth considering specific retirement accounts like individual retirement accounts (IRAs) and employer-sponsored 401(k)s, which come with tax advantages.

The Bottom Line

Cash management accounts (CMAs) and brokerage accounts each offer distinct features and benefits. CMAs provide a consolidated stop for banking needs with check writing, savings, and sometimes investing options. They are a great choice if you value convenience, easy access to your money, and lower risk. On the other hand, brokerage accounts are primarily designed for investing in the financial markets and can offer potentially higher returns, albeit at a higher risk.

Your choice between a CMA and a brokerage account, or potentially using both, should align with your financial goals, risk tolerance, and specific needs. Always conduct thorough research or consult with a financial advisor before making such decisions to ensure the best fit for your financial situation.

Article Sources Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

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