Cash Management vs. Savings Accounts: What They Are and How to Choose the Best APY

Approx 7-10 min

Summary:

• If you’re a high earner looking to build wealth, prioritize saving for an emergency fund and big upcoming expenses.
• Start by comparing APYs for savings and cash management accounts (CMAs). Compare interest rates, watch out for hidden fees, and ensure FDIC/SIPC insurance.
• CMAs offer flexibility, while savings accounts are often more secure. Choose the most suitable option based on your financial goals and liquidity needs.

Is your household income between $150,000 and $300,000, but still feel like you’re not saving or investing enough to build wealth?

If this is you, your first priority should be building an emergency fund to avoid high-interest debt from unforeseen expenses. Ideally, your emergency fund should cover 3 to 6 months of your current living costs. Next, you must set aside cash for big upcoming expenses like a wedding or a new car.

Saving is less exciting than investing. However, an effective savings strategy is essential for avoiding high-interest debt, which can quickly derail your wealth-building efforts.

Savings and Cash Management Accounts

A savings account is a safe, interest-earning option at a bank or credit union, typically insured by the FDIC up to $250,000 per depositor, per institution.It’s ideal for holding cash to meet short-term goals like a vacation or a new car, as well as for building an emergency fund.

A cash management account (CMA) is offered by non-bank financial institutions, often brokerages, combining the features of traditional checking and savings accounts. It allows easy access to funds for spending, transfers, or bill payments while earning interest, typically at higher yields than ordinary checking accounts. Insurance coverage can vary. Verify whether funds are protected by FDIC through a partner bank or SIPC insurance for brokerage accounts.

As of October 14, 2024, the national average savings account yield is 0.58% APY (annual percentage yield), based on Bankrate’s survey. However, some online banks and other institutions offer much higher APYs for high-yield savings and cash management accounts, which this article will explore.

If you’re a high earner, not rich yet (H.E.N.R.Y), these accounts can be used to grow your cash reserves, enhance liquidity, and reduce reliance on debt, paving the way for wealth building.

Comparing APYs: What Makes a Rate Excellent?

The annual percentage yield (APY) represents the yearly interest earned on an investment, taking compound interest into account. Compound interest boosts the principal balance by adding the interest you earn back into your account, so you end up making interest on your interest with each successive compounding period.

Frequent compounding (e.g., monthly versus annually) increases the total amount of interest you earn over time.

The APY can be either variable or fixed. A variable APY indicates that the interest rate may fluctuate over time, which will affect the yield. A fixed APY guarantees that the interest rate will remain constant throughout.

All other things being equal, a higher APY indicates a better return on the cash held in your savings account or CMA.

You can compare APYs across financial institutions to find the best deal. The formula for calculating it is as follows:

Where:

• r = nominal interest rate
• n = number of compounding periods per year

The APY formula calculates the effect of compounding interest over time. Keep in mind that rates are subject to change based on market conditions and financial institution policies.

As of October 2024, a better APY for a high-yield savings account is up to 4.5%, well above the national average of 0.58%. For a cash management account, on the other hand, an APY higher than 5% can be considered excellent.

APY plays a crucial role in growing your money and helping you keep pace with inflation. It not only accounts for the interest you earn on your initial deposit, but also the interest that accumulates over time through compounding.

For instance, if you hold $100,000 at 1.5% APY, you’ll see it grow to about $116,159 in 10 years. But bump that APY up to 2%, and you could reach around $121,899 — that’s a difference of $5,740 just from a small 0.5% increase in APY.

The APY comparisons provided are hypothetical examples for illustrative purposes only and do not guarantee future returns. Always verify rates and terms directly with the provider.

Pros and Cons of Savings Accounts

Here’s a quick rundown of the pros and cons of traditional and high-yield savings accounts in the U.S.

Pros

1. Safety: Funds in traditional savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000, protecting your cash from theft or bank failure.
2. No Account Fees: Many traditional and high-yield savings accounts charge no monthly maintenance fees, particularly if you can sustain a preset minimum balance.
3. Easy Access to Funds: Savings accounts allow you to withdraw cash or transfer funds online, often within 1-2 business days. Plus, you can make in-person withdrawals at bank branches or ATMs without limits. Hence, savings accounts are ideal for high earners who want quick access to their cash, while still earning interest.

Cons

1. Low Returns: Savings accounts, even the high-yield ones, don’t always provide the best returns. They often fall short of keeping pace with inflation, causing the real value of your savings to decrease over time.
2. Limited Flexibility: For career-driven, affluent professionals who may need quick access to cash for investments or large purchases, withdrawal limits on savings accounts can be a hassle. It might make it harder to manage fluctuating expenses or seize financial opportunities without penalties, restricting their ability to efficiently allocate funds in line with their dynamic financial needs.
3. Savings accounts may limit withdrawals to six per month under federal Regulation D rules. Exceeding this limit can result in penalties or account conversion to a checking account.
4. Minimum Balance: Some banks and financial firms will require you to maintain a minimum balance in your savings account to avoid fees. If your balance falls below that threshold, account maintenance fees kick in, eating into your interest and making it harder to grow your savings.

Pros and Cons of Cash Management Accounts

In this section, we’ll take a look at the advantages and pitfalls of CMAs, especially for affluent professionals.

Pros

• Streamlining Finances: CMAs can streamline your finances by combining the features of a checking and savings account. You can save, spend, and invest from a single account, achieving more efficient money management.
• Competitive Interest Rates: CMAs typically offer higher APYs than traditional brick-and-mortar banks. You earn more on your deposit, making it a good way for young earners to efficiently grow their savings without sacrificing accessibility.
• Greater Flexibility: With the combined benefits of a savings and checking account, CMAs facilitate quick access to cash while still earning significant interest. Many CMAs also come with features like debit cards, bill pay, and mobile check deposits, further enhancing financial flexibility.

Cons

• No Local Customer Support: Often, CMAs are offered by online-only fintech companies or non-bank financial institutions, so they may lack physical branches. This can be frustrating if you prefer in-person assistance. Instead, customer support is usually provided online or via phone, which might not offer the same personal touch or immediate resolution.
• FDIC Coverage Limitations: While CMAs are often offered by brokerage firms, many of them partner with FDIC-insured banks to make sure your funds are protected. The specific insurance limits, however, will vary depending on the provider. Not all cash in a CMA may be covered by FDIC insurance, leaving your money partially or completely unprotected in case of bank failure.
• Fees: CMAs can sometimes come with hidden fees, such as maintenance fees, transaction fees, or foreign transaction fees, which can eat into your returns. You must thoroughly research the CMA provider to avoid hidden fees, and opt for a reputable company to ensure transparency.

How to Evaluate and Compare Rates Across Providers

When looking for the best place to save money and earn interest, start by comparing rates across banks, credit unions, and online platforms. Focus on high-yield savings accounts and CMAs, as they generally offer the best balance of flexibility, returns, security, and accessibility.

Check the APY

Look for the best high-yield savings accounts of 2024, ensuring the APY is at least 4-5%. If you opt for a CMA instead, also ensure that the APY is no less than 5%.

If you choose to go the CMA route, for instance, Marygold & Co. is introducing the Marygold Cash Account, which offers a 6% APY for both new and existing account holders. The account has no time limits, minimum balance requirements, or penalties for early withdrawal.

Let’s compare the difference in returns with a typical high-yield savings account offering a 4% APY versus a CMA with 6% APY, on a $20,000 balance held for three years.

High-Yield Savings Account with 4% APY:

• Future Value (3 years later) = $22,486.08
• Total Returns = $2,486.08

CMA with 6% APY:

• Future Value (3 years later) = $23,874.76
• Total Returns = $3,874.76

This is just an example of how different APYs can impact your returns over time. Before deciding on a savings or cash management account, be sure to do your own research and (if possible) consult a trusted financial advisor. This blog is for informational purposes only and should not be taken as financial advice.

Watch for Fees

When evaluating where to build your emergency fund or save for a big upcoming expense, ensure that the provider — be it a bank, credit union, or online platform — doesn’t charge hidden fees like maintenance or withdrawal fees. These can cut into your returns. So, be sure to do your research. All reputable financial institutions are transparent about their fees and penalties.

Promotional Rates

When looking for savings accounts or CMAs with the highest APYs, be cautious of promotional rates. In order to attract new customers, some financial service providers offer high introductory APYs that decrease after a few months. So, before putting in your hard-earned money, always verify whether the APY is fixed or variable over time. To effectively evaluate and compare rates across providers, you must always review the full terms and conditions.

Insurance

When beginning your savings journey, you mustn’t forget to check for FDIC or SIPC insurance. This insurance is meant to protect your deposits (up to a certain extent) in case the bank or financial institution fails.

FDIC protects your deposits in banks up to $250,000. SIPC, or the Securities Investor Protection Corporation, safeguards your cash in brokerage accounts (e.g., CMAs), also up to $250,000. Both provide essential security, ensuring you won’t lose your money if the institution fails.

By thoroughly researching and evaluating these above-mentioned factors, you’ll find the best place to store your money while maximizing interest earnings.

Deciding Which Account Is Right for You

To decide where to save your money, consider your financial goals and cash needs. If security is your top priority, a traditional savings account with an established bank would be ideal for short-term savings goals or an emergency fund.

However, for higher returns and more flexibility, a CMA like the Marygold Cash Account could be a better choice. CMAs offer the accessibility of a checking account along with the higher interest rates of the best high-yield savings accounts.

When evaluating your options, be sure to compare APYs and check for FDIC or SIPC insurance. Also, consider less obvious factors like the availability of in-person customer support, mobile banking features, and ease of fund transfers. Don’t forget to review account maintenance fees, withdrawal restrictions or penalties, and minimum balance requirements.

The right account should cater to your specific money goals, helping you grow your money without compromising on access or security.

Disclaimer: This blog is for informational purposes only and should not be taken as financial, legal, or tax advice. Rates and features mentioned are subject to change without notice. Always verify account details with financial providers and consult a financial advisor for personalized recommendations.