Cash management account vs. money market fund — Which is better?
If you’re looking to put your cash in a financial institution, you might be considering a cash management account or money market funds. Both offer some advantages for those looking to earn interest or otherwise keep a ready supply of cash on hand. But which is better for you?
Here are some key advantages and disadvantages of cash management accounts and money market funds and how they compare to one another.
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 features of both into a practical account that lets you spend with a debit card or pay bills and still earn a potentially attractive level of interest, too.
Often money at cash management accounts is swept to the financial institution’s partner bank, where it can earn interest for you and enjoy the full protection of the FDIC. In fact, some institutions – such as the best robo-advisors – give you millions in FDIC protection.
The best cash management accounts offer a lot of features such as:
- A checking account with debit card
- No fees, including no overdraft fees and no monthly fees
- Early paycheck direct deposit
- A competitive interest rate on your cash balance
- Fee-free ATMs
- “Round-up” investing on your spending
In contrast, a money market fund is a kind of savings option available at many banks and brokerages. Also known as money market mutual funds, these funds are low-risk investments that can pay an attractive interest rate and you won’t have to endure market volatility to get it.
Money market funds are required by law to invest in short-term debt securities such as certificates of deposit, U.S. Treasury bills and short-term corporate debt known as commercial paper. The weighted average maturity of a money market fund’s holdings 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, which is a fee based on the amount of money invested in the fund. The fee averaged about 0.13 percent in 2022, according to the Investment Company Institute. In other words, that would cost $13 annually for every $10,000 you have invested in the fund. Not steep, but not free, either.
Money market funds typically have a share price of $1, though in extreme market dislocations, the funds sometimes fall below that price.
Pros and cons of cash management accounts and money market funds
Pros of cash management accounts
- Interest-bearing: Cash management accounts often offer interest on your cash balance, and in some cases it may be an especially competitive rate, making the account an attractive place to stash your cash.
- FDIC protection: If the cash management account sweeps your balance to a partner bank insured by the FDIC, then your cash is protected by the FDIC, too. Some of the top accounts will allow you to hold millions of dollars all safely with FDIC protection.
- Easy to move to or form an investment: Since cash management accounts are often tied to brokerage or robo-advisor accounts, it’s a “staging ground” for money going to or coming from your investment account. For example, when you sell an investment, the proceeds become part of the cash management account and start earning interest.
- Spending and savings account: The best cash management accounts give you a lot of features of checking and savings accounts, plus some bonus features such as fee-free ATMs and early paycheck direct deposit, so this kind of account can be highly practical and could even replace a standard banking account.
Cons of cash management accounts
- Interest rates may not be competitive: While some of the best cash management accounts offer highly competitive rates, not all of them do. So if that’s important to you, be sure to check what the account offers. Interest rates will fluctuate with the prevailing rate environment, so you won’t be able to lock in a rate.
- May not have some features: Some of the extra features of the best cash management accounts may not be offered with all such accounts. For example, debit cards may come with one firm’s account but not another’s. Double-check the firm’s offering, if a specific feature is vital to you.
- Minimum balances: Some cash management accounts may require a minimum balance or may require a minimum balance before you start earning interest.
- May be online-only: Some cash management accounts may be available only if you work with an online financial institution.
Pros of money market funds
- Interest-earning funds: Money market funds can earn an attractive interest rate, but you’ll need to understand exactly what you’re buying and what it’s paying. Rates will change as the prevailing interest rate climate rises or falls.
- Low-risk: Money market funds are low risk, but that doesn’t mean no risk. Technically you could still lose money if debt markets seize up. Historically that has been very rare.
- Highly liquid: Money market funds own highly liquid investments and that in turn means that you can buy and sell them easily on any day the market is open.
- Better for short-term money: Money market funds are better for short-term money, such as an emergency fund, that you may need to access on short notice.
Cons of money market funds
- May not outpace inflation: While money market funds may pay interest, that doesn’t mean that the rates will outpace inflation. You’ll need to decide whether it’s a good time to own money market funds and how much you want to put in them. The interest rate will change with the prevailing interest rate environment. Generally, as broader rates go up, so will your return on the money market fund, and vice versa.
- Not good for long-term money: Given that they may not often outpace inflation, money market funds are not attractive for long-term money, such as a retirement account. A well-diversified portfolio of stocks has tended to vastly outpace inflation over time.
- Not FDIC-insured: Money market funds are not protected by the FDIC, so your principal is not guaranteed. While loss has been rare, it’s not nil.
- Expense ratios: You’ll need to pay a small percentage of your principal 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 money market fund – depends on your individual financial needs.
If you’re looking for a comprehensive account that can let you save and spend, then a cash management account may be the better option. But not all accounts are the same, and you’ll need to look for an account that offers what you need. The good news: Plenty of accounts offer a lot of features and an attractive interest rate, so you won’t have to make much sacrifice.
A money market fund may be a better option when you’re just looking for an attractive interest rate, especially if you’re holding cash in a brokerage account. The money market fund can get interest rolling in the door at low risk, and the rate will likely even go up as prevailing interest rates go up, as the fund rolls over its portfolio into new higher-yielding investments. Of course, the same is true in reverse if rates fall, with the return on the money market fund declining.
Bottom line
Your individual financial situation plays a huge role in which option may be better for you. You’ll need to look around and see what financial institutions are offering, since cash management accounts can differ markedly from one to another. And if you’re looking to buy a money market fund, you’ll want to understand its key features, including its return and expense ratio.
