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Understand the Different Cash Management Alternatives and How to Compare Them

There are many different alternatives for helping you manage your cash, and each alternative has its own benefits and costs. Traditional cash management alternatives include checking accounts and savings accounts. Less traditional, but important, alternatives to cash management include money market deposit accounts, certificates of deposit, money market mutual funds, U.S. Treasury bills, U.S. Series EE bonds, and U.S. Series I bonds.

The best way to evaluate cash management alternatives is to review the characteristics of each type of account, such as liquidity, minimum balances, interest rates, safety, costs, and benefits. Liquidity refers to how quickly and easily you can access your money. Minimum balance refers to how much money must be in the account in order to qualify the account for specific benefits, such as a low interest rate or check-writing privileges. Interest rate refers to the Annual Percentage Rate (APR) of return received on the money in the account. Safety refers to the guarantee that the assets will be protected by either a direct guarantee (i.e., FDIC or NCUA insurance) or an indirect guarantee (i.e., the asset is a liability of the U.S. government). Costs refers to the costs associated with holding the account, including late fees, overdraft protection fees, and minimum balance fees. Benefits include special tax incentives that could make your earnings tax-free at the state or federal level.


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