One of the newest phenomena in personal finance is cash sweep accounting. But what is this trend, and how is it going to help your money grow?
Simply put, it’s a method in money management that makes sure the money is put to the best possible use. That way, it’s not just wasting away in a checking account earning little to no interest.
In the event of an emergency, as many as 55 million Americans have little personal savings. And four out of five Americans, according to the National Institute on Financial Protection, have fewer than one year’s worth of money saving for retirement.
But what if you’re not sure how to properly handle your cash? What if you’re not sure what stocks you need to put money into or how much savings you even need to keep? What if you really don’t want to spend the time more effectively shifting your money around?
Enter cash sweeping.
What Is Cash Sweeping?
Cash sweeping, or a sweep account, is a checking account that transfers cash to a savings account automatically until a certain sum of money is met by the checking account.
Here’s how it looks. Say that you open a sweep account at your bank and set $2,000 for the sweep total. The bank will immediately move the balance of $2,000 to an account with a higher interest rate if the checking account reaches $2,000.
The big advantage is that without having to do extra or manual work, you can make more money and expand your savings. Instead of letting your extra cash idle in your bank, by saving regularly with a sweep account you can convert your money into more cash.
Investment accounts, of course, come with expenses. People who opt to sweep accounts need to be mindful that commissions are likely to be paid on their savings. A flat rate is charged by some brokerages, while others charge a percentage. Before you make any investments, it is important to be mindful of the payments as they act as a small but real cost.
How Robo Advisors Are Utilizing Cash Sweeping
Robo advisers have now dramatically altered the investment environment. By lowering the barrier to entry (you can start investing with as little as $5 with certain robo advisors ), they have helped millions of people to get into the market who wouldn’t have gotten in otherwise.
Many of these advisors are now aiming to revolutionize checking accounts.
In late 2018, Betterment, one of the largest robo advisors in the game (managing assets of $15 billion), launched a “Two Way Sweep” option for its savings accounts.
It’s called Two Way Sweep because, depending on the criteria, Betterment can sweep cash both into and out of your checking accounts. The Betterment method analyzes whether or not there is enough space in the bank account to account for the next 21-35 days. You chose whether you like your account to have a 21- or 35-day cushion. Betterment then tests what the quantity ought to be.
What’s the Catch?
Fees are the biggest sweep-account catch.
There are savings plans with high interest rates that receive the same or even better than any of these investment accounts. For instance, Ally Bank pays 2.2% interest on its savings accounts and no minimum balance payments or monthly maintenance fees are paid.
Per year, Betterment charges a management fee of 0.25%. This means that the more cash you make (and then save) the higher your payments will be.
Sweep accounts can be a perfect way to expand your savings especially if you are holding excess cash. These accounts might be ideal if you’re somebody that really doesn’t have the interest or patience to keep track of your checking account and if you want to pass money between accounts automatically. And if you’re investing in a robo contractor already, this might be another way to optimize what you get out of it.
Sweep accounts carry a lot of allure for Millennials, in particular. A generation bogged down and saddled with declining incomes by student loan debt suggests that it will be difficult to find spare capital to spend. Investing when you are a complete novice is also challenging.
Sweep accounts take the burden of saving away from the hands of the Millennials.
All and all, sweeping accounts, as long as the payments make sense, can be a perfect way to develop your savings over time. Take the time to really get acquainted with how much you spend per year in payments, and balance it against your anticipated returns.