Two Money Tools to Explore: High-Yield Savings Accounts and Cash Sweep Programs
Regardless of market conditions and everyday expenses, it's always wise to have savings goals and plans. And if you want to potentially grow your money securely, there are tools available to help you.
With most of those tools, one crucial and consistent factor comes into play: interest.
Anyone with a mortgage (or any other form of loan) is probably pretty familiar with the concept of interest. It’s a fee charged by the lender to the borrower for using his money.
When it comes to investing, interest can also play an important role. With an interest-earning account, you can make money by simply parking cash you don’t plan on using in the short term with a bank or other financial institution.
With some accounts, interest rates can be pretty subpar -- but finding an option with a competitive annual percentage yield (APY) can help maximize how much interest you can generate, just by leaving the cash idle in the account over time.
The hunt for a higher, variable APY can come in several options. Here’s a few to consider: high-yield savings accounts (HYSA) and cash sweep programs. Wondering which one is right for you to help achieve your goals? This will depend on your objectives as these two types are used for different reasons.
Read on to learn more about HYSA and cash sweep programs, how they work, and pros and cons.
Key Takeaways:
Both high-yield savings accounts and many cash sweep programs can enable you to earn a higher degree of interest on your cash when compared to traditional checking or savings accounts.
A high-yield savings account allows individuals to generate higher interest on their savings – but it can sometimes be a challenge to withdraw those funds.
A high-yield savings account is generally used to set aside money for a rainy day fund or to save for some other mid to longer-term financial goals.
A cash sweep-enabled brokerage account allows investors to earn interest on their uninvested cash while they plan their next investment moves. This cash is automatically swept or moved to program banks, where it starts to earn interest. A brokerage account is required to participate in a cash sweep program.
What is a high-yield savings account (HYSA)?
In the 1980s, a new type of savings account was designed to earn a much higher interest rate — and the HYSA was born.
A HYSA is a type of savings account wherein individuals can receive higher interest on their deposits vs a traditional savings accounts. Typically, the higher the balance, the higher the rate of return with compound interest, earned over a year.
An advantage of a HYSA is that individuals can earn more interest than they would with a traditional savings account without having to commit to a longer-term time horizon or face penalties for early withdrawals like you potentially can with a Certificate of Deposit.
The interest rates for HYSAs can offer an APY of 10 to 20 times higher at rates of 4% to 5% or higher(1) vs the national average savings account rate of 0.46%(2), according to the Federal Deposit Insurance Corporation (FDIC) as of Oct. 16, 2023. This feature that can be the difference maker when it comes to using a HYSA.
How do HYSAs work?
Just like traditional savings accounts, with an HYSA you can deposit money you don’t plan to use for daily expenses. But a HYSA isn’t like your grandma’s old savings account.
Here’s how it works: When you deposit money into a HYSA, you are giving the financial institution permission to use those funds in the interim. That institution, such as an online bank, will invest your funds, and then pay you interest based on the amount that you have allowed them to use.
But there’s more than just receiving a higher APY when considering a HYSA.
Pros and cons of HYSAs
Here are some pros and cons to consider first.
HYSA pros:
Easily deposit at any time, whether it’s by ATM, online from a mobile app, or an online transfer from another online account.
Automate your savings with automatic bank transfers or deposits from your paycheck.
Define your savings plan by separating your funds into buckets while still enjoying easy access (sometimes by an ATM card or check).
Your savings are FDIC insured.
HYSA cons:
Some banks require minimum deposits or average balances to keep your account open and they may charge maintenance or overdraft fees.
It takes time and effort to access your money — often over multiple days and several steps.
There is a limit on the number of withdrawals you can make.
Interest rates can change, so your yield is not always predictable.
What is a cash sweep program?
Another alternative to receiving a potentially higher APY can come through a cash sweep-enabled brokerage account. This isn’t a savings account but a common feature of a brokerage account that provides customers with a way to manage their uninvested cash and earn interest on this.
Cash sweep programs are offered by participating brokerages and the swept money at the program banks are insured by the FDIC. This ensures that your money is secured, up to a certain amount.
These aren’t a new idea, and have been around since the 1970’s when Merrill Lynch introduced cash management accounts.
How do cash sweep programs work?
With a cash sweep-enabled brokerage account, you deposit money in your investment account that’s intended to purchase securities with but don’t plan to use in the short term. The brokerage will automatically transfer uninvested cash amounts into a deposit account at a program bank that earns interest.
Cash sweep programs can offer competitive APYs – often comparable to those of HYSAs.
Pros and cons of cash sweep
Considering receiving a higher APY through a cash sweep program? Here’s what you should know first.
Cash sweep pros:
Add money to your investment account at any time.
Allow your cash balances to grow over time if you're not ready to invest. This way, you don't have to worry about losing money on market swings for that portion of your investment portfolio.
Rest easy knowing your swept uninvested funds are insured by the FDIC, up to certain limits. Any amount over that limit is not insured.
Money can be pulled from a cash sweep program to make a trade without needing another deposit or awaiting a transfer, assuming it covers the cost of transaction.
No limits on the number of withdrawals that can be made.
Cash sweep cons:
Rates can be variable and is subject to change without notice.
Typically do not offer features like ATM access, debit cards, or checks.
Some brokerages will limit the amount you can deposit per month by free electronic fund transfer methods such as Automated Clearing House (ACH).
For many brokerage cash sweep programs, there is a $250,000 limit at each program bank, which includes any deposit account under the same name. Any amount over this limit may not be covered.
Which tool is right for you?
Just like any other financial wellness decision, there is no one-size-fits-all answer. Instead, your choice should be based on your goals, values, trading needs, and future planning.
A HYSA may be the right choice for investors looking to take a “set it and forget it” approach through this long-term savings account. Interest rates can change, but typically there shouldn’t be any big surprises and regularly checking the account won’t make a difference in how it grows.
But if you are considering getting started with investing – or are already an investor – cash sweep may be the right alternative. This is because cash sweeps help you earn interest on unused cash, but still allow you to trade with those funds as you wish.
In other words, if you want to save money, consider a HYSA. But if you want to invest and trade, and earn interest on any uninvested cash, you may want to consider enrolling in a cash sweep program. Many people have both as they can address different objectives.
With their linked cash sweep and investment accounts, investors can focus on staying up to date on the stock market, knowing their cash is still earning money. Once investors are ready to trade again, they can request their money from the cash sweep program and access it without extra transfers or deposits.
Keep these factors in mind when making your choice
A HYSA and a cash sweep program are similar in their opportunities to earn higher APYs but they are intended to be used differently and they are different types of tools for your money.
If your goal is to build your savings and think more long-term, then a HYSA may be a better option for you. With a cash sweep program, this can provide opportunities to also grow your uninvested cash through a potentially higher interest but it is not intended to serve as a savings vehicle.
Ultimately, you should speak with a trusted financial professional to discuss your investment goals and determine which alternative to grow interest may be better for you. It’s also important to have a trading plan, set investment goals, conduct research and ask questions to your financial institution.
Moomoo’s Cash Sweep makes earning interest on uninvested cash easy.
If you’re considering cash sweep, moomoo’s got you covered. With moomoo’s Cash Sweep Program your uninvested funds can earn interest – with no minimum account value requirements, no upper limits to how much interest can be earned, and no access restrictions.
This is open to U.S. securities account holders only, provided by Moomoo Financial Inc. (MFI). New and qualified existing customers* can initially receive a 5.1% APY (subject to change) with interest accruing daily and paid monthly.
*5.1% APY eligibility: All new user brokerage accounts. Existing user brokerage accounts must refer a friend to deposit $100+ OR deposit $500 themselves to access the higher rate (If conditions are not met, rate is 0.03%).
The Moomoo Financial Inc. (MFI) Cash Sweep Program is a feature of your brokerage account. Interest is earned on the uninvested cash swept from your MFI brokerage account to program banks. Program banks then pay interest on your swept cash, minus any fees paid to MFI. The APY might change at any time at the program banks' or Moomoo Financial's discretion. Additionally, any fees Moomoo Financial receives may vary and is subject to change. Neither Moomoo Financial Inc. nor any of its affiliates are banks. For more information on the cash sweep program, click here.
When the uninvested cash in your brokerage account is swept to deposit accounts at program banks, it becomes eligible for FDIC insurance up to $1 million or $250,000 per program bank, inclusive of any other deposits you may already hold at the bank in the same ownership capacity, which may impact how much is covered. You are responsible for monitoring the total amount of deposits that you have with each Program Bank, in order to determine the extent of FDIC deposit insurance coverage available to you. MFI is not responsible for any insured or uninsured portion of the Deposit Accounts or any other deposits at the program banks.
Please note that until funds are swept to a program bank, they are held in your brokerage account which is protected by SIPC. Once funds are swept, they are no longer held in your brokerage account and are not protected by SIPC. However, these funds are eligible for FDIC insurance through the Program Banks subject to FDIC insurance coverage limits.
Investing is risky. Moomoo is a financial information and trading app offered by Moomoo Technologies Inc. In the U.S., investment products and services on Moomoo are offered by Moomoo Financial Inc., Member FINRA/SIPC.
Sources:
1. https://www.forbes.com/advisor/banking/savings/history-of-savings-account-interest-rates/
2. https://www.fdic.gov/resources/bankers/national-rates/index.html