If you want to put your money in a financial institution, you may be considering a cash management account or money market funds. Both offer a number of benefits for those who want to earn interest or otherwise keep a stash of cash on hand. But what is better for you?
Here are some key pros and cons of cash management accounts and money market funds, and how they compare.
Cash Management Account vs. Money Market Fund
A cash management account is an account typically offered at non-bank financial institutions, such as brokerage firms and robo-advisors. This type of account is an alternative to a traditional checking or savings account and combines the features of both into a practical account that allows you to spend money with a debit card or pay bills and still earn a potentially attractive interest rate.
Often, money held in cash management accounts is sent to the financial institution’s partner bank, where it can earn interest for you and enjoy the full protection of the FDIC. Some institutions – like the best robo-advisors – will even offer you millions in FDIC protection.
The best cash management accounts offer many features, such as:
- A checking account with debit card
- No fees, including no overdraft fees and no monthly fees
- Direct deposit of early wages
- A competitive interest rate on your cash balance
- Free ATMs
- ‘Round-up’ investing in your expenses
A money market fund, on the other hand, is a type of savings option available from many banks and brokers. Also known as money market mutual funds, these funds are low-risk investments that can pay attractive interest rates and don’t require you to weather market volatility.
Money market funds are required by law to invest in short-term debt securities, such as certificates of deposit, U.S. government bonds and short-term corporate bonds, also known as commercial paper. The weighted average maturity of a money market fund’s investments must be 60 days or less. This requirement keeps money market funds liquid and accessible as a short-term investment.
The funds charge an expense ratio, a fee based on the amount of money invested in the fund. According to the Investment Company Institute, the fee averaged about 0.13 percent in 2023. In other words, that would cost $13 annually for every $10,000 you invested in the fund. Not steep, but not free either.
Money market funds typically have a share price of $1, although the funds sometimes fall below that price during extreme market disruptions.
Advantages and disadvantages of cash management accounts and money market funds
Benefits of cash management accounts
- Interest-bearing: Cash management accounts often offer interest on your cash balance, and in some cases it can be a particularly competitive rate, making the account an attractive place to store your money.
- FDIC Protection: If the cash management account transfers your balance to a partner bank that is insured by the FDIC, your funds are also protected by the FDIC. Some of the best accounts allow you to hold millions of dollars safely with FDIC protection.
- Easy to move or become an investment: Because cash management accounts are often linked to brokerage or robo-advisor accounts, it is a “gathering place” for money moving into or out of your investment account. For example, when you sell an investment, the proceeds become part of the cash management account and begin to accrue interest.
- Spending and savings account: The best cash management accounts give you many of the features of checking and savings accounts, plus some bonus features like free ATMs and direct deposit on early payouts, so these types of accounts can be very practical and can even replace a standard bank account. .
Disadvantages of Cash Management Accounts
- Interest rates may not be competitive: While some of the best cash management accounts offer very competitive rates, not all do. So if that’s important to you, be sure to check out what the account has to offer. Interest rates fluctuate depending on the prevailing interest rate environment, so you cannot lock in an interest rate.
- May not have certain features: Some of the additional features of the best cash management accounts may not be offered with all such accounts. For example, debit cards may come with one company’s account but not another’s. Double-check the company’s offerings if a specific feature is essential to you.
- Minimum balances: Some cash management accounts may require or require a minimum balance before you start earning interest.
- Possibly online only: Some cash management accounts may only be available if you work with an online financial institution.
Advantages of Money Market Funds
- Interest-bearing funds: Money market funds can earn attractive interest rates, but you need to know exactly what you are buying and what it will yield. Rates will change as the prevailing interest rate environment rises or falls.
- Low risk: Money market funds have low risk, but that does not mean there is no risk. Technically, you can still lose money if debt markets freeze. Historically, that has been very rare.
- Very fluid: Money market funds hold highly liquid investments and that in turn means you can easily buy and sell them on any day the market is open.
- Better for money in the short term: Money market funds are better for short-term money, such as an emergency fund, which you may need to access at short notice.
Disadvantages of money market funds
- Must not exceed inflation: Although money market funds may pay interest, this does not mean that interest rates will exceed inflation. You need to decide if it is a good time to own money market funds and how much you want to invest in them. The interest rate will change depending on the prevailing interest rate environment. In general, as broader interest rates rise, so does your money market fund return, and vice versa.
- Not good for money in the long run: Because they may not often beat inflation, money market funds are not attractive for long-term money, such as a retirement account. A well-diversified stock portfolio has tended to easily outperform inflation over time.
- Not FDIC Insured: Money market funds are not protected by the FDIC, so your principal is not guaranteed. Although loss is rare, it is not zero.
- Cost ratios: You will have to pay a small percentage of your principal amount to the fund management company as an expense ratio. The fee can vary from fund to fund, so you’ll want to find a low expense ratio and a high interest rate on money.
Cash Management Accounts vs. Money Market Funds – Which is Better?
Which account is better – a cash management account or a money market fund – depends on your individual financial needs.
If you’re looking for a comprehensive account that allows you to save and spend, a cash management account may be the better option. But not all accounts are the same, and you’ll need to look for one that offers what you need. The good news: Many accounts offer many features and attractive interest rates, so you don’t have to make much of a sacrifice.
A money market fund may be a better option if you’re just looking for an attractive interest rate, especially if you keep cash in an investment account. The money market fund can roll in interest at low risk, and interest will likely even rise if prevailing interest rates rise as the fund rolls its portfolio into new, higher-yielding investments. The same applies in reverse, of course, if interest rates fall, which reduces the return on the money market fund.
In short
Your individual financial situation plays a major role in determining which option is best for you. You will have to look around and see what financial institutions have to offer as cash management accounts can differ significantly from each other. And if you want to buy a money market fund, you need to understand its key features, including its return-to-expense ratio.
