What Is a Sweep Account?
A sweep account is a type of bank or brokerage account that automatically moves any extra money beyond a specific threshold into a higher-interest investment option at the end of each business day. Usually, this surplus cash is transferred into a money market fund.
Understanding Sweep Accounts
A sweep account, such as a sweep fund, is a convenient way for customers to earn more interest on their money with minimal effort. At the end of each day, any extra money in the account is automatically transferred to a high-interest investment option.
This kind of account is beneficial for both businesses and individuals. It ensures that money is not left idle in a low-interest checking account when it could be earning higher returns in other liquid cash investment options. These options may include money market mutual funds, high-interest savings accounts, and short-term certificates with 30-, 60-, or 90-day maturities.
Originally, sweep accounts were created as a solution to a government regulation that prevented banks from offering interest on commercial checking accounts. They provide a way to gain additional returns on unused cash without requiring much personal intervention.
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However, it’s essential to be aware of the costs associated with sweep accounts. Some institutions charge flat fees, while others take a percentage of the investment yield. It’s crucial to monitor these fees to ensure that the benefits from higher returns don’t get offset by the account charges.
Personal Sweeps vs. Business Sweeps
Sweep accounts are a useful tool commonly used by brokerages and businesses to manage their cash reserves and maximize earnings. For individual investors, sweep accounts are employed to hold money temporarily while waiting to reinvest it, such as dividends, incoming deposits, or proceeds from sell orders. These funds are automatically transferred to high-interest holding accounts or money market funds until the investor decides on future investments or until the broker executes standing orders within the portfolio.
For businesses, sweep accounts are especially beneficial, particularly for small businesses with daily cash flows. They set a minimum balance for their main checking account, and any excess funds above that threshold are swept into a higher-interest investment product. If the account balance falls below the minimum, the funds are swept back into the checking account from the investment account.
The sweep process typically occurs daily from the checking account, but the return of funds may experience some delays, depending on the institution and investment vehicle. It’s worth noting that some banking institutions also offer high-interest rates on amounts over certain balances due to changes in checking account regulations.
How Do Sweep Accounts Work?
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A sweep account is a special type of bank or brokerage account that connects to an investment account. It automatically moves money when the balance goes above or below a specific minimum limit. Usually, this is done to transfer extra cash into a money market fund, where it can earn higher interest compared to a regular bank account.
Sweep accounts can also work in the opposite direction, shifting funds from an investment account back to a checking account if the account owner’s balance drops below a certain threshold. This way, it helps manage the money efficiently between the two accounts and ensures that the funds are put to the best use based on the set rules.
What Is the Difference Between Personal and Business Sweeps?
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Brokerages often utilize individual sweeps to hold client funds temporarily until the owner makes investment decisions. For instance, a sweep account may transfer extra cash into a money market fund, which offers higher returns compared to a regular checking account.
On the other hand, business sweep accounts are commonly used by small companies with substantial cash flows. These accounts enable the company to earn interest on excess cash reserves while ensuring they have sufficient cash available to cover business expenses. This way, businesses can optimize their cash management, making the most of their funds without compromising their operational needs.
Why Are Sweep Accounts Useful?
Sweep accounts, whether used for business or personal purposes, provide a simple method to make sure that money is not left idle in a low-interest bank account but instead earns a return. Some institutions offer an auto-sweep feature, which links the sweep account to the non-sweep account. When the defined upper and lower thresholds are crossed, the transfers are automatically initiated, making the process even more convenient for the account holder.
The Bottom Line
Sweep accounts are special accounts offered by banks and brokerages that facilitate the movement of surplus money between a client’s cash account and an investment account. When the cash account holds more money than needed, the extra amount is automatically transferred into the higher interest-earning investment account. This clever mechanism allows the client to earn interest on their unused money, making the most of their funds.
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