Understanding Sweep Accounts
Automation is everything these days, especially when it comes to money management. Thanks to sweep accounts, idle money gets a boost, even while you sleep. A sweep account links two or more bank accounts and automatically moves—or “sweeps”—low-interest funds between a cash account and either a higher-interest account or loan account.
What Are Sweep Accounts?
A sweep account is a brokerage or bank account that automatically transfers funds between accounts at the close of each business day. The goal is to take passive money sitting in a cash account and “sweep” it into an active account—either to an investment account or loan account—based on a target balance.
The target (or peg) balance of the cash account is predetermined by the account holder. For example, Altabank helps determine an average balance that should be kept in your primary BizSmart™checking account to cover day-to-day expenses. If the amount exceeds the target balance at bank closing time, then the unused cash is automatically swept into an investment account.
This excess cash is transferred into the linked account, typically an interest-bearing one like a money-market fund. Here, it gains interest overnight. However, if the cash account needs money the next day, that amount is automatically swept back out of the interest-bearing account and into the cash account to cover the withdrawal.
Business Accounts and Personal Accounts
Sweep accounts provide both small businesses and personal bankers a way to leverage unused money sitting idly in a low-interest account. In the 1970s, sweep accounts were created to curb a government regulation that limited banks from offering interest on commercial checking accounts. Today, commercial and personal sweep accounts offer automation to capitalize on higher interest rates or debt relief.
Choosing the Right Account
Sweep accounts are a low-risk way to balance cash flow and investing. Both commercial and personal customers can benefit from sweep accounts to (1) increase funds in an investment account or (2) pay down debt in a credit account.
Investment Sweep Accounts
Investment sweep accounts transfer funds automatically into a secondary, higher interest-earning account, such as a money market fund. Sweep accounts may not produce the same returns as investing money directly into stocks, ETFs, mutual funds or other investments, but they can offer a safe and reliable way to grow your money. Overall, sweep accounts provide an easy-to-access, on-demand cash source for investments.
Loan Sweep Accounts
A loan sweep account, on the other hand, transfers excess funds automatically to and from a credit account. Also known as a credit sweep, these types of accounts help eliminate overdrafts, minimize borrowing costs, and ultimately pay down your debt.
How Sweep Accounts Work for You
Sweep accounts can also be used to provide other benefits to account holders. For example, Altabank clients can sweep excess funds into specialized accounts that provide insurance coverage well above what is covered by the FDIC on standard business and consumer accounts.
Most banks will charge a flat fee for the sweep account or a percentage of the yield. However, you may also have to pay fees on the investment account that might make the sweep not as attractive on a net basis.
Overall, sweep accounts provide the greatest amount of interest, with the least amount of effort from the account holder.