Both checking accounts and Cash Management Accounts (CMAs) are types of bank accounts that allow you to access your funds. Here, we will review each option, their pros and cons, and what distinguishes them from each other.

What is a Cash Management Account?

A Cash Management Account (CMA), or app, is a multifunctional financial product that combines checking, savings, and investment features in a non-bank account. These accounts are typically offered by brokerage firms, fintech companies, and robo-advisors, providing a seamless way to manage funds.

Initially, individuals can open a CMA with their chosen account provider. They can then deposit funds into the account and freely use them for various purposes, including making payments, transferring funds, and accessing cash as needed.

One significant advantage of CMAs over traditional savings accounts is that they may offer higher interest rates, making them an attractive option for earning returns on deposits. Additionally, CMAs often provide investment services such as research and trading, enabling users to explore investment opportunities while conducting other financial activities.

Overall, CMAs serve as an efficient, flexible financial tool, offering an integrated solution for banking and investment services to enhance money management.

Pros

Cons

Convenience

Not covered by the Federal Deposit Insurance Corporation (FDIC)

Higher interest rates

Not a bank

Access to investment services

Limited financial products

What is a Checking Account?

Banks offer checking accounts for daily financial transactions. These accounts allow account holders to easily access their money through branches, ATMs, online banking, or mobile apps.

Checking accounts are typically used for short-term needs, such as paying bills, shopping, and managing day-to-day expenses.

These accounts often come with features such as debit cards, check-writing privileges, and electronic funds transfer capabilities. While checking accounts may not earn as much interest as cash management apps, they offer greater liquidity and accessibility of funds.

Although many banks offer free checking accounts, account holders should maintain sufficient balances to avoid overdraft fees, and they may also be subject to monthly maintenance fees.

Pros

Cons

Covered by the Federal Deposit Insurance Corporation (FDIC)

Fees

Wide range of financial product options

Low interest rates

Bank reputation

Requirements for opening an account

Checking Account vs. Cash Management Account: Key Differences

Both checking accounts and Cash Management Accounts (CMAs) are financial products designed to help manage funds, but they have some key differences:

Purpose and Target Audience: Checking accounts are primarily used for daily transactions, bill payments, and managing day-to-day expenses. On the other hand, CMAs cater to those seeking a more comprehensive solution that combines the benefits of a checking account with higher interest rates and investment opportunities for surplus cash.
Fees and Requirements: Checking accounts may charge fees and have minimum balance requirements. Some CMAs may also charge fees, but many offer free accounts or lower fees compared to traditional checking accounts.
Interest Rates: Checking accounts typically offer minimal or no interest on deposits. In contrast, CMAs usually provide higher rates on cash balances, making them more attractive for earning returns on idle funds.
Investment Options: CMAs often offer investment options, such as money market funds or ETFs, allowing account holders the potential for higher returns from their cash balances. Checking accounts lack such investment functionalities.
Transaction Restrictions: Both checking accounts and CMAs offer convenient access to funds, but checking accounts may have certain transaction restrictions, such as a limited number of free ATM withdrawals or transfers per month. CMAs can offer greater flexibility in this regard.
FDIC Insurance: Checking accounts are insured by the FDIC, meaning your funds are protected up to $250,000 in case of bank failure. CMAs are not covered by the FDIC.
Choosing Between Them

Ultimately, the best account type for you depends on your personal needs and financial situation. If you are looking for a basic account for daily transactions, a checking account is a good choice, especially with the variety of checking account types available.

If you prefer an account that offers higher interest rates and more functionalities, a CMA might be more suitable for you.

When deciding which type of account suits you, consider the following factors:

• Your financial goals
• Your spending habits
• Fees
• Risk tolerance

When Might a Checking Account Be a Good Idea?

A checking account might be more suitable in the following scenarios:

• Managing significant funds: If you have a substantial amount of money to deposit, a bank might be a better option. Remember, you can deposit money into CDs or savings accounts, which offer interest rates similar to those of cash management apps.
• Daily transactions: If you primarily need an account for daily transactions, paying bills, and managing day-to-day expenses, then a checking account is a straightforward, practical choice.
• FDIC insurance: If the safety of your funds is your top priority, a reputable bank’s checking account can provide up to the legal limit of FDIC insurance (currently up to $250,000 per depositor).
• Convenience of basic features: Checking accounts come with standard features like debit cards, check-writing capabilities, and convenient ATM cash withdrawals. They are more direct, and you also get customer support.

When Might Setting Up a Cash Management Account Be a Good Idea?

A cash management account might be better in the following scenarios:

• Starting your financial journey: If you’re just starting your financial journey, cash management apps can help you explore interesting aspects of finance, such as saving, managing funds, and even investing.
• Higher interest rates: If you’re looking to make more from idle cash, CMAs often offer higher interest rates than traditional checking accounts, making your money work harder for you. For instance, Wealthfront offers a 4.55% annual percentage rate for its cash account.
• Investment opportunities: If you have surplus funds beyond immediate expenses, CMAs can offer options like money market funds or ETFs, potentially increasing your returns.
• Comfort with non-FDIC protection: If you’re comfortable with the level of protection offered by CMA providers (which may differ from FDIC insurance), then this might not be a significant issue.