Did you know you can have too much money in your checking account? Since most checking accounts earn little to no interest (with the exception of high-yield checking accounts), it doesn’t make sense to keep money in a checking account beyond what you need for day-to-day spending.
If you have additional funds, it’s better to move the money to a savings account, an investment account, or use it to pay off debt.
If you want help moving money to the right place, using something called a “sweep account” can help. With sweep accounts, you decide up front where you want your excess checking balance to go, and the money is automatically moved there for you at the end of each business day.
What is a sweep account, and how does it work?
Sweep accounts allow you to set a balance limit and have any additional funds automatically “swept” into your other accounts. Accounts with a sweep feature are usually checking or brokerage accounts, and they’re mostly used by businesses. But sweep accounts are available for individuals, too.
When you exceed your set limit on a sweep account, the money is usually moved to an account where it can earn more interest, such as a savings or investment account. However, the funds can also be applied to a loan or a line of credit to pay down your debt. If the balance on the sweep account gets too low, money can be swept back in from savings or investing accounts.
Common types of sweep accounts
Depending on your account type, you can set it up to move your money to a few different places. Here are the main types of sweeps you can do:
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Investment sweep: Move your extra funds into deposit accounts that earn more interest, such as money market accounts (MMAs). You can also choose short-term, low-risk investment options such as money market funds (MMFs).
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Loan sweep: Also known as debt sweeps, loan sweeps let you put your excess funds toward debt payments for loans and lines of credit.
For example, Wells Fargo’s Cash Sweep account has a default Money Market Fund Sweep that moves your excess funds to an MMF. Wells Fargo’s MMF currently earns an average yield of 3.52%.
Benefits and drawbacks of sweep accounts
Sweep accounts function differently from regular bank accounts, so it’s important to understand their features before depositing your money. Here’s an overview of the pros and cons that come with using a sweep account.
Pros
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Funds are moved automatically, without any effort on your part.
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Funds are usually transferred overnight.
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Potential to earn more interest on your deposits.
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Potential to pay down debt sooner.
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No interruptions to your cash availability.
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Avoid overdrafts by keeping a set minimum on deposit.
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Money swept to external accounts can be eligible for more insurance coverage.
Cons
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Not beneficial if you have limited funds in your account.
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Account fees may exceed the interest you earn.
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Sweeping money out of an investment account can lead to financial losses.
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Some institutions have limited options for where you can move your money.
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You can face cash shortages if you set your sweep limit too low.
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Money swept into investment accounts might not be insured.
How to set up a sweep account
When you set up a sweep account, you’re ultimately choosing multiple accounts where you want your money to go: a checking or brokerage account, plus other deposit accounts or investment accounts. So, choosing the right sweep account involves a little more work than opening a regular checking account.
Here’s how to set up a sweep account the right way, and what to expect from your account:
1. Start by comparing sweep accounts at different banks. To make a fair comparison, make sure you can find the following information:
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What accounts can you sweep funds to?
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What are the fees for each account?
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What are the interest rates on each account?
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Are there minimum deposit requirements?
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How can you access your money?
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How much insurance is available for each account type?
2. Open an account and deposit your funds into the account.
3. Choose a “threshold” or “target balance” for your account.
4. Choose where you want your excess funds to be transferred.
5. At the end of each business day, the financial institution will evaluate your balance. Excess funds are then typically transferred overnight. If your account balance falls short, money will be swept back into the account.
With sweep accounts, it’s important to keep an eye on all the accounts your money is disbursed to. If you’re not happy with how much money is staying in your main checking or brokerage account, or you want to change where your money is swept to, make sure to contact your financial institution to adjust your preferences.