Share
When managing your business or personal cash, it's crucial to understand the differences between the primary products available. In this blog post, we break down the most significant cash management products, including checking accounts, savings accounts, government money market funds, prime money market funds, T-Bills, and CDs. Each of these products exceeds a trillion dollars in size. Along with describing their key differences, we’ll also grade them based on important factors like liquidity, interest rates, and safety.
Checking Account / Demand Deposit Account (DDA)
A checking account, or Demand Deposit Account (DDA), is the primary payment account for both individuals and businesses. It offers unlimited transactions and supports various payment types, including wires, ACH transactions, debit card payments, checks, and internal transfers within the same bank. If offered by a bank, checking accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per institution, per ownership category. Credit unions offer similar protection through the National Credit Union Administration (NCUA).
Banks typically pay little to no interest on these accounts. For most consumer and small business accounts, most transactions other than wires are free. However, for middle-market and large companies, banks often charge fees for payments and other services due to the higher volume of transactions and associated processing costs. Historically, U.S. laws (specifically Regulation Q of the Glass-Steagall Act) prohibited banks from paying interest on demand deposit accounts, including checking accounts, to prevent destabilizing price competition during the Great Depression. This prohibition was in effect until 2011.
For larger corporate accounts, companies may be compensated with an Earnings Credit Rate (ECR), which helps offset treasury management charges for payments and other services. If the earnings offset exceeds the treasury management fees for the month, the customer typically does not receive additional cash interest. This scenario, often referred to as an inefficient balance, benefits banks by increasing their zero-cost deposits, but companies should manage their balances to optimize interest income by moving excess funds to higher-yielding accounts.
Some banks offer interest-bearing checking accounts, where larger companies can earn higher interest rates but must pay for all transaction costs. Additionally, hybrid checking accounts might pay an ECR until treasury management fees are covered, with any remaining funds earning cash interest.
Given the low-interest environment of checking accounts, it is important to manage cash efficiently by minimizing the amount left in low-yielding accounts.
Ease of Access to Funds Grade: A+
Interest Grade: F
Safety/Loss of Value: A
Overall Grade: C (Maintain only the minimum necessary balance)
Savings Accounts / Money Market Accounts
Savings accounts are designed for funds that are not needed in the near term. Before April 2020, Regulation D limited certain types of withdrawals and transfers from savings accounts to six per month. Although this limitation has been lifted, some banks still impose transaction limits on their customers. Savings accounts generally offer higher interest rates than checking accounts and are typically free of charge. These accounts are also FDIC insured, subject to the standard insurance limits.
Banks are willing to pay higher interest on savings accounts because they typically incur fewer transactions, reducing the cost to service these accounts. Although it is technically possible to access funds as quickly as from checking accounts, some banks may limit the use of wires and same-day ACH from a savings account. Traditional ACH and internal transfers (book transfers) are the primary payment options associated with savings accounts.
Ease of Access to Funds Grade: A-
Interest Grade: A-
Safety/Loss of Value: A+ (With the ability to increase FDIC insurance coverage through an FDIC sweep program)
Overall Grade: A (Should be used as the core cash management account)
Government Money Market Funds
Government money market funds are a type of mutual fund that invests in short-term, highly liquid, and low-risk securities issued by the U.S. government and its agencies. These funds provide a safe place for consumers and companies to park their cash while earning a modest return, typically higher than what is available in traditional savings accounts.
Government money market funds are regulated by the SEC under Rule 2a-7. Unlike prime money market funds, which can invest in a broader range of high-quality securities, government money market funds invest exclusively in government securities. At least 25% of their portfolio must be held in daily liquid assets, and at least 50% in weekly liquid assets. Government money market funds are not subject to liquidity fees or gates during times of liquidity stress. While these funds are not FDIC insured, the likelihood of a loss of principal is extremely low and would require significant market stress.
Redemption requests can be settled on the same day, provided instructions are received early enough in the afternoon. To access their funds, users would need to send wire, same-day ACH, or standard ACH instructions to transfer money to their operating account or to a third party.
Ease of Access to Funds Grade: A-
Interest Grade: A
Safety/Loss of Value: A-
Overall Grade: A- (A great cash management product)
Prime Money Market Funds
Prime money market funds are mutual funds that invest in short-term, high-quality, and highly liquid securities, including corporate debt, certificates of deposit (CDs), commercial paper, and other non-government debt instruments. These funds offer a stable and accessible place to park cash while earning a yield typically higher than that of government money market funds.
Prime money market funds are subject to less stringent liquidity rules than government funds, with only 10% of the portfolio required to be held in daily liquid assets and 30% in weekly liquid assets. While rare, investments in prime money market funds could lose principal due to floating Net Asset Values and/or liquidity fees during times of stress. Because of the risk of principal loss, prime money market funds may not be suitable for all investors.
During normal market conditions, redemption requests and payment requests are typically settled in the same manner as government money market funds.
Ease of Access to Funds Grade: A-
Interest Grade: A
Safety/Loss of Value: B+
Overall Grade: B+ (A solid cash management product, but possibly not worth the extra risk)
T-Bills
U.S. Treasury Bills (T-Bills) are short-term debt securities issued by the U.S. Department of the Treasury. They are among the safest and most liquid investments available, backed by the full faith and credit of the U.S. government. T-Bills are a popular choice for both individual and institutional investors seeking a secure place to park their cash while earning a modest return.
T-Bills have short maturities, ranging from a few days to one year. The most common maturities are 4 weeks, 8 weeks, 13 weeks (3 months), 26 weeks (6 months), and 52 weeks (1 year). T-Bills do not pay interest during their term. Instead, they are sold at a discount, and the return is realized when the T-Bill matures and is redeemed for its face value, making it a fixed-rate interest product.
T-Bills are highly liquid and can be easily bought and sold in the secondary market before maturity. However, the standard settlement time for T-Bills is late afternoon on the following business day (T+1). Some financial institutions may not allow ACH payments with the proceeds of T-Bills until they are fully settled, potentially delaying the ability to make payments until the following day (T+2). In general, T-Bills are less liquid than money market funds and savings accounts.
Ease of Access to Funds Grade: B+
Interest Grade: A+
Safety/Loss of Value: A-
Overall Grade: A- (A good product for obtaining fixed rates, but less liquid than a savings account. Should be used to supplement your primary cash management account)
CDs (Certificates of Deposit)
A Certificate of Deposit (CD) is a type of savings account offered by banks and credit unions that pays a fixed interest rate for a specified term. CDs are a low-risk investment often used by individuals looking to earn a higher return on their savings compared to regular savings accounts. In exchange for a higher interest rate, the investor agrees to leave the money in the CD for the entire term, which can range from a few months to several years. CDs are also FDIC insured, subject to the same standard insurance limits.
Unlike other products besides T-Bills, CDs pay a fixed guaranteed rate of interest during the term of the CD. However, unlike T-Bills, CDs are most often non-tradable instruments, making them less liquid than T-Bills, money market funds, and savings or checking accounts. Some banks offer breakable CDs, which allow early withdrawal in return for forfeiting a portion of the earned interest.
Ease of Access to Funds Grade: C
Interest Grade: A
Safety/Loss of Value: A
Overall Grade: B+ (A good product for obtaining fixed rates, but only for the portion of your portfolio that can be less liquid)