Are you someone who wants their money to work smarter, not just harder?
Of course you are! Sweep accounts might be the financial tool you’ve been seeking.
In this post, we’ll be looking at:
- sweep accounts
- how they work
- the various types
- why you might consider getting one
What is a sweep account?
At its core, a sweep account is a financial manager that moves or ‘sweeps’ extra money from your bank account into an investment that earns more interest.
These choices usually include moving money from your account into money market funds and short-term investments that give your money a chance to earn interest instead of just sitting there.
With sweep accounts, you can keep track of your steady flow of cash – between a cash account used for regular expenses and an investment account where the cash can earn more.
How does a sweep account work?
A sweep account works in four basic steps:
- Open a cash account and deposit a certain amount of money.
- You and your financial advisor discuss and determine the average balance that should be kept in this account, depending on the bank or brokerage’s requirements and your financial goals.
- Once your account balance is above the average balance, this triggers a sweep, and the excess funds will be invested into a money market, CD, or some other form of investment that can be easily liquidated.
- When the balance in the cash account falls below the average balance, some of the investment is liquidated, and the proceeds get deposited into the cash account, thus maintaining the average balance.
The sweep process typically occurs at the end of each business day.
Types of sweep accounts
Multiple types of sweep accounts exist, and each has its own benefits.
Others may put money into high-yield investments, interest-bearing checking accounts, or use the money to pay off bills. The decision relies on your personal tastes and financial goals.
Money market sweep account
These move extra money from a checking account to a money market fund immediately. They offer a higher interest rate than regular checking accounts. Money market funds buy low-risk, short-term assets.
Sweep savings account
This type of sweep account puts extra money into a linked savings account, which usually has higher interest rates than a checking account. It keeps the money available while making slightly higher returns.
Investment sweep account
This type allows you put extra cash into higher-yield investments like bonds, mutual funds, or other short-term assets. The money is invested so that it can earn better returns, but it is still easy to get to when it’s needed.
Repurchase agreement sweep account
Larger businesses often use repurchase agreement sweep accounts, which let them put extra cash in a repurchase agreement. A repurchase agreement is a short-term, collateral-backed loan that pays a little more interest than a regular savings or money market account.
Loan sweep
If:
- you have extra money in your checking account, a Loan Sweep will pay down your line of credit regularly, which will save you money on interest.
- you need money to clear checks or keep the service balance, the credit line will put money into the bank account.
- there are extra funds in the bank account, they will be sent directly to the credit line as a principal-only payment, up to the total amount that is still owed.
Be sure to inquire at your bank or brokerage about the kinds of sweep accounts they offer. Ask about the terms and any fees that might apply.
Why do people use sweep accounts?
People use sweep accounts for various reasons, some of which are:
- Automatic transfers: to transfer excess funds from a checking account into higher-yield investments or interest-bearing accounts to maximize returns.
- Liquidity management: to maintain a minimum balance in the checking account while utilizing excess funds for investment, ensuring both liquidity and potential earnings.
- Interest maximization: sweeping funds into interest-bearing accounts or short-term investments, users aim to earn higher interest rates than those offered by traditional checking accounts.
- Convenience: sweep accounts automate the process of managing funds, ensuring that idle money is always put to use rather than sitting in a low-interest account.
- Risk management: Some sweep accounts are designed to minimize risk by spreading funds across multiple investments, reducing exposure to any single asset class.
Overall, sweep accounts:
- provide a way to optimize cash flow
- potentially earn higher returns on idle funds
- effectively manage liquidity without requiring active involvement from the account holder
How do I open a sweep account?
How you open a sweep account may be different from one bank to the next.
But here are some general steps that are involved when opening one:
Step 1: Decide what you want your sweep account to be used for. This will help you choose whether to put your money into money market funds or pay off loans.
Step 2: Open an account with a bank or brokerage that offers a stock sweep account.
Step 3: Set a limit for the balance on your account. Any amount that is higher than this balance will be swept into other accounts.
It is important to read the small print of your sweep account. It will have important details, like the threshold limit.
If you are investing in money market funds, you should also check your sweep account’s cost ratio. This is the amount it costs you in fees and charges to use the sweep account versus the amount you gain in interest on your money.
Things to consider when opening a sweep account
- Interest rates and returns: Even though interest rates on sweep accounts are better than those on regular checking accounts, they may not be the best returns on the market. You might want to look at the interest rates that different sweep choices offer and compare them to other ways to invest.
- Risk and liquidity: Sweep accounts usually have low risk, but they also pay less than stocks with higher risk. As a result, they make it easy to get money, which can be helpful in an emergency.
- Fees and minimum balance requirements: In some sweep accounts, there may be fees or a minimum amount that needs to be kept. To avoid getting charged extra, it’s important to understand these terms.
- Financial goals and needs: Think about what you want and need from your money. If you need cash quickly and don’t care about higher returns, a sweep account might be right for you. Want higher earnings and can keep your money locked up for a longer time? You might be better off with another type of investment.
Can I withdraw my money from a sweep account?
Yes, you can withdraw money from your sweep account.
The goal of sweep accounts is to make it easy to get to your money quickly. Usually, you can transfer money back to your main checking account whenever you need to. This kind of flexibility allows you to access your funds easily and quickly for things such as:
- making payments
- paying bills
- or investing
Are sweep accounts safe?
Sweep accounts are offered by banks and financial organizations with regulatory oversight. This makes them a relatively safe financial vehicle.
However, factors like market conditions have an impact on sweep accounts, just like they do with any other financial product.
While market conditions do not affect the sweep account directly, they do affect the performance of the investment vehicles used by the sweep account. This ultimately affects the safety and returns on your sweep account.
Before opening a sweep account, you should thoroughly research and understand the terms and conditions before choosing a sweep account.
If you are unsure if you can open one, you can consult a financial advisor to provide more personalized advice based on your financial situation and goals.
Photo by Alexander Grey on Unsplash