Maximizing Your Cash: A Guide to Brokerage Accounts and Beyond

When it comes to managing your finances, understanding where to store your cash is crucial. Whether you’re looking to invest or simply earn interest on uninvested funds, knowing your options can help you make the most of your money. At O1ne Mortgage, we are dedicated to helping you navigate these choices. Call us at 213-732-3074 for any mortgage service needs. Let’s dive into the various ways you can manage your cash effectively.

Understanding Brokerage Accounts

A brokerage account is an investment account that provides access to the stock market. It allows you to trade and invest in stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Unlike retirement accounts such as 401(k)s and traditional IRAs, you can access your funds without penalty, although you will likely be taxed on investment gains. Brokerage accounts are versatile tools for both short- and long-term financial goals.

Uninvested Cash in a Brokerage Account

At any given time, you might have cash in your brokerage account that you haven’t yet invested or withdrawn. Many brokerage firms will automatically “sweep” this money into an interest-earning account or other investments. Options vary from one brokerage account to the next, and interest rates and risk levels can fluctuate.

Storing Cash in a Brokerage Account

There are multiple ways to hold cash in a brokerage account. These methods differ from similar accounts you might find at your bank because they are provided through brokerage firms and robo-advisors, not financial institutions.

Cash Management Accounts (CMAs)

Uninvested funds in a brokerage account might be swept into a cash management account (CMA). This type of account combines the features of a checking and savings account. Account holders can transfer funds, pay bills, and some have a linked debit card for everyday transactions. CMAs typically have lower fees compared to traditional bank accounts. At the time of this writing, some have annual percentage yields (APYs) that top 4%.

Money in a brokerage account is insured by the Securities Investor Protection Corp. (SIPC) for up to $500,000. Brokerages and robo-advisors typically partner with FDIC-insured banks to provide CMAs, so when uninvested cash is swept into a CMA, it’s typically covered for up to $250,000 per depositor, per financial institution. For larger amounts of money, some brokerages will spread your funds across multiple accounts to keep more of your cash insured.

Money Market Funds

A money market fund is a type of mutual fund that invests in short-term, low-risk assets, such as CDs and government bonds. They are considered safer investments that can provide income via regular dividend payments. They are particularly attractive when interest rates are on the rise because dividend payments are linked to short-term interest rates.

Higher-than-average APYs are a big draw. Some money market funds have yields that currently exceed 5%. One drawback is that money market funds are not insured by the FDIC or SIPC. While the risk is on the lower side, it’s always possible to lose money.

Pros and Cons of Keeping Cash in a Brokerage Account

Pros

• CMAs are linked to your brokerage account. Money in a cash management account can earn interest and be used to purchase more securities through your brokerage account, allowing you to easily reinvest your earnings.
• Some cash management accounts have extra perks, such as no account fees and cash back opportunities, on top of the APY.

Cons

• You may find better APYs elsewhere. Some high-yield savings accounts currently have yields greater than 5%. If you have a large chunk of cash, you might secure better returns outside of a brokerage account.
• You could lose money. If your money is swept into a money market fund, that cash won’t be insured by the FDIC or SIPC. It’s possible to lose money.

Alternate Places to Store Your Cash

High-Yield Savings Accounts

As the name implies, these accounts offer higher interest rate yields than traditional savings accounts, helping your money grow faster. Money in high-yield savings accounts remains easily accessible, making them a great place to store your emergency fund or other cash savings.

Certificates of Deposit (CDs)

With a CD, your money is locked up for the length of the CD term, which can range from one month to 10 years. You’ll likely be penalized for withdrawing your funds before the term ends, but holding out could be worth it. Some CD rates are currently as high as 5.48%.

Money Market Accounts

In some ways, a money market account is similar to a cash management account. Both earn interest and allow you to withdraw funds with a debit card or checkbook. However, some money market accounts are limited to six electronic withdrawals and transfers per month. Currently, it’s possible to secure APYs above 5%.

The Bottom Line

Brokerage accounts aren’t just for investing in the stock market. They can also put your uninvested cash to work, allowing you to earn even more. APYs and risk can vary depending on your brokerage firm or robo-advisor. In some cases, it might make more sense to store your cash in a high-yield savings account or other low-risk investment vehicle.

At O1ne Mortgage, we are here to help you make the best financial decisions. For any mortgage service needs, call us at 213-732-3074. Let us assist you in navigating your financial journey with confidence.