Apr
17
2023
Brokerage Account vs. Cash Management Account

Cash Management Accounts (CMAs) vs Brokerage Accounts: How They Compare

By | Growing Wealth, invest, Investing | Comments Off on Cash Management Accounts (CMAs) vs Brokerage Accounts: How They Compare

Investors need a brokerage account to buy and sell securities, but they can also take advantage of a cash management account (CMA), which is offered by a brokerage firm. It can be easy to confuse the two types of accounts, even though they are quite different.

To provide some clarity about the difference between a brokerage account vs. cash management, this article will examine some of the pros and cons of each. Let’s start with some definitions.

What Is a Cash Management Account?

Cash management accounts can offer similar features as the traditional checking or savings accounts that banks offer. CMAs allow you to deposit money and earn a set interest rate. Most provide access to your money via debit cards, in addition to checks.

What Is a Brokerage Account?

Brokerage accounts allow customers to deposit money which can then be used to buy and sell investments such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other securities.

There are three main types of brokerage accounts.

•   A full-service brokerage firm usually provides a range of financial services including financial advice and automated investing.

•   A discount brokerage offers lower fees in exchange for fewer financial planning services.

•   Online brokerages allow you to trade via the internet and often charge the lowest fees.

Recommended: How Does a Brokerage Account Work?

Similarities Between a Cash Management Account and Brokerage Account

Although brokerage and CMA accounts work in different ways, there are some similarities.

Both Offered by Brokerages

Both types of accounts are offered by brokerage firms. When you open a brokerage account and link it to a CMA at the same firm, it can provide a convenient way for customers to transfer assets from one account to another when they buy and sell securities.

The Potential to Earn Returns

When considering a brokerage account vs a cash management, remember that they both offer customers the potential to earn money on deposits or investments.

In a self-directed brokerage account you have the potential to earn returns from your investments, although you also face the risk of loss that likewise comes with investing in stocks, bonds, and other securities.

A cash management account is generally a safer place to keep your money. The risk of losing money is lower than putting your money into securities, and you’ll earn interest on your deposits. But those rates are generally lower than the gains you might see from other investments.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.20% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


The Brokerage Account vs Cash Management: What Are the Differences?

Cash management accounts and brokerage accounts work in different ways. CMAs mirror traditional savings and checking accounts and brokerage accounts are strictly for investments. Here are the details:

Earnings Come From Different Places

In a brokerage account, potential earnings come from the gains you might see when investing in stocks, bonds, and other investments. Investing in securities also comes with the risk of losses.

Earnings in cash management accounts come from the interest rate paid on your balance. Usually, these rates are similar to the rates paid in traditional savings accounts.

CMAs also act like traditional checking accounts because you can use checks or a debit card for purchases. But traditional checking accounts don’t usually pay interest, or if they do the rate is often lower than a CMA.

Earnings on Brokerage Accounts Are Potentially Higher Over Time

Over time, the average return of the stock market has substantially outperformed what you can earn from interest in a savings account. With those potential earnings comes market risk, meaning you may experience losses too, especially in the short-term.

To manage a brokerage account or work with a broker, you need to take into account your tolerance for market risk and what combination of stocks and bonds is right for your financial goals.

Insurance Is Provided by Different Sources

When you open a new bank account, up to $250,000 of your cash deposits are covered by the Federal Deposit Insurance Corporation (FDIC). Some banks, however, participate in programs that extend the FDIC insurance1 to cover millions.

Most brokerage accounts, however, are insured by the Securities Investor Protection Corporation (SIPC) in the event of theft, fraud, or if the broker fails. The SIPC offers up to $500,000 of coverage total, per person, if such a loss were to occur. The SIPC does not cover investment losses.

Cash management accounts have so-called sweep accounts, which are insured by the FDIC. Here’s how it works: CMAs sweep funds into a variety of FDIC-insured banks. If you make a $200,000 deposit, for example, your money may be split into four $50,000 deposits in four different bank accounts. (The CMA provider manages this process — you only see your total CMA balance.)

Before your money is moved into the different accounts, your deposit is protected by SIPC insurance if the brokerage is an SIPC member.

What Money in These Accounts Can Be Used for

Because CMA accounts have checking and/or debit cards, you can use that money for purchases or bill paying or ATM withdrawals.

Money kept in a brokerage account is strictly used for trading securities. But by linking a CMA to your brokerage account, you can easily transfer cash from one to the other, for investing purposes.

The Takeaway

When considering a brokerage account vs. cash management, it helps to know what makes these accounts different, and how they can work together. While a brokerage account is for trading securities, and comes with the risks associated with investing in securities, a cash management account (CMA) is similar to a traditional checking or savings account. There’s almost no risk of losing money, and your deposits can earn interest. Because both are offered at brokerage firms, you can have both, and use your cash management account as a place to keep funds you don’t wish to invest.

To determine which account is right for you or if you should have both, it’s best to look closely at your financial goals and determine what type of returns and account features suit your aims.

SoFi Checking and Savings is an all-in-one account that blends the features of checking and savings accounts. With the special “vaults” feature, you can separate your savings from your spending, earn competitive interest on your total balance, and pay no account fees or monthly fees.

Create a SoFi Banking account today and bank better.

FAQ

Are brokerage accounts and cash management accounts the same?

No. Brokerage accounts are used to buy and sell securities. Cash management accounts act more like traditional bank savings and checking accounts, but are provided by brokerage and other non-bank financial institutions. Sometimes the accounts may be linked. But the accounts earn money from different sources.

Can you keep cash in a brokerage account?

No. You can use cash deposits in your brokerage account only to purchase securities. A cash management account, on the other hand, is similar to a traditional savings or checking account, so cash balances are welcome (and earn interest).

Do cash management accounts and brokerage accounts work together?

In most cases, yes. If you have a CMA and a brokerage account at the same brokerage firm and the accounts are linked, you can use your CMA to move cash into your brokerage account in order to execute trades. You can also transfer the money from sales of securities into your CMA for safekeeping. The combination gives you the ability to purchase stocks, bonds, mutual funds and other securities, but also offers the flexibility, liquidity and interest earnings of traditional bank accounts.

Photo credit: iStock/Aja Koska

1SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by banks in the SoFi Insured Deposit Program. Deposits may be insured up to $2M through participation in the program. See full terms at SoFi.com/banking/fdic/terms. See list of participating banks at SoFi.com/banking/fdic/receivingbanks.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
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Apr
17
2023
What Is a Cash Management Account

Guide to Cash Management Accounts (CMAs)

By | Budgeting & Goals, Family Finances, money | Comments Off on Guide to Cash Management Accounts (CMAs)

A cash management account or CMA provides an alternative solution for storing a large sum of money. Instead of using a checking or savings account from a traditional bank or credit union, you can park your money with non-financial institutions such as robo-advisors, online investment companies, or trading apps. While CMAs provide some of the features you receive from traditional banking, they also make managing your money more convenient since you can keep your banking and investing under one roof.

Here’s your complete guide to cash management accounts to discover if this type of account is right for you. We’ll share details on:

•   What is a cash management account?

•   How do cash management accounts work?

•   What are the benefits and considerations of cash management accounts?

•   Is a cash management account right for you?

What Are Cash Management Accounts?

Let’s explore what a cash management account is exactly. A CMA or cash management account provides a solution for managing your cash flow and your money. The cash inside the account usually earns interest, so your money can grow over time. You also may have checking writing capabilities, debit card access, or a combination of both. These non-banking institutions usually have no fees, another attractive aspect of using a cash management account. However, they typically make their money by charging fees for other services such as investing, retirement planning, or financial planning services.

While traditional banking accounts have similar benefits, the biggest draw to a cash management account is that you can bank and invest with one company. This way, you’re not toggling back and forth between several companies or platforms to manage your money.

How Do Cash Management Accounts Work?

Now that you know what a CMA is in big-picture terms, let’s drill down on how they work. Cash management accounts are interest-earning accounts that offer a safe place for cash. Since investment firms and robo-advisors are not banks, they don’t keep your money at their financial institution. Instead, they partner with several banks and spread your deposit out among them.

Like traditional banking accounts, account holders can deposit funds, withdraw funds, transfer money, set up direct deposits, write checks, and use a debit card. You can manage your personal cash flow statement by checking on your CMA regularly.

In addition, some CMAs earn interest like savings accounts and have checking account capabilities. Therefore, they can act as a way to merge these accounts into one. However, some CMAs may not have features of both accounts, so check with the institution to determine what features are available.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.20% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


What Are the Pros of Cash Management Accounts?

Understanding the benefits of using a cash management account can help you determine if this is the right banking solution for your needs. With that in mind, here are several advantages of using a cash management account.

Convenience

The most significant pull for consumers to open a cash management account is that they can keep their investments and banking under one umbrella. Keeping everything in one place can simplify your money management efforts.

Traditional Banking Features

When you open a cash management account, you typically have access to tradition banking features like:

•   Direct deposit

•   Complementary ATM networks

•   Electronic bill pay

•   Third-party payment site access

But, before you open an account, make sure you check with the institution about their banking services. This way you can ensure they have everything you need.

FDIC Insured

The Federal Deposit Insurance Corporation (FDIC) protects your banking deposits from losses up to $250,000. Worth noting: Some banks participate in programs that extend the FDIC insurance to cover millions1.

So, if your bank fails for any reason, you can recover your funds. While non-banking firms are prohibited from offering FDIC insurance directly, their partner banks can extend coverage. Since nonbanks spread funds across several partner banks, each can offer $250,000 of FDIC insurance per depositor.

What Are the Cons of a Cash Management Account?

Now that we’ve considered the advantages of a cash management account, it’s only fair to review the potential downsides of these financial vehicles. Here are some points to keep in mind as you decide whether a CMA is right for you.

Lower Interest Rates

While these accounts do offer some earnings, you will often find better rates at online banks. Yes, it may as if low-interest checking accounts are the norm and that CMAs are in their ballpark, but dig a bit deeper. If you are planning on parking a large sum of cash in an account, it can literally pay to explore your options elsewhere and see what APY’s are available in high-interest accounts. You may find that a short-term savings account works better for your needs.

Recommended: APY vs. Interest Rate: What’s the Difference?

Fewer Features

Cash management accounts may not offer the conveniences of checking accounts, like bill pay and other ways of making your financial life simpler.

No Physical Branches

Many cash management accounts are offered by online banks, which means you won’t have bricks and mortar locations to visit. Nor will you have a team of bankers to support you as you do at a traditional bank. If you are the kind of person who prefers personal interaction, this may be a significant issue for you.

Cash Management Accounts vs Checking Accounts

While cash management accounts offer similar services and features to traditional bank accounts, you might wonder what the differences are. If we break down CMAs compared to checking accounts further, these features are worth noting.

•   Maintenance fees. There are usually no maintenance fees for CMAs. However, you may have to meet a minimum balance to keep your account active. On the other hand, depending on the bank, some high-yield checking accounts come with maintenance fees. It may be possible to get these fees waived if you meet specific bank stipulations, but it’s worthwhile to consider this point.

•   Interest earning. Many cash management accounts earn interest, like what you find with high-interest online savings accounts. While it’s possible to earn interest on a savings account, it’s usually less than the interest cash management accounts earn.

•   Account integration. Investment firms and robo-advisors usually offer cash management accounts and investments. You can usually link your CMA with your investments, making it easy to move money and automate contributions. Traditional banks may also offer retirement and investment services. However, that’s not their primary business. Also, if you have investments and banking accounts separate, there may be a time lag for transactions, which usually doesn’t happen with CMAs.

Considerations When Comparing Cash Management Accounts

Before you enroll in a cash management account, it’s wise to compare all of your options. You may also want to assess the pros and cons of each banking solution. So, when comparing your solutions, here are some things worth considering when determining if a CMA is suitable for your needs.

Customer Service

When you need an issue resolved with your money, it’s nice to know customer service is there to help. So, you will want to make sure that the company you’re considering offers a robust customer service solution to assist you with all of your questions or concerns. For online banks, check out the hours that support is available and find out if you’ll be interacting with a human or an automated assistant.

Minimum Balance Requirement

As we noted above, CMAs can have minimum balance requirements to keep the account active. Therefore, you’ll want to determine these requirements in advance to see if you have the appropriate sum of cash to deposit.

Investment Management

Most of the institutions that offer cash management accounts offer investment services. So, if you’re looking to use their investment service, make sure you select a company you trust and feel comfortable with. You’ll also want to ensure the investments offered are suitable for your needs.

Is a Cash Management Account a Good Fit for You?

A CMA is ideal for folks who like to manage their investments and bank accounts under the same umbrella. It may make managing your money somewhat simpler and smoother.

But, for those who feel a bit uncertain about using online banks or mobile apps to complete their daily transactions, a bank account may be a more viable solution. Also, if you would prefer to separate your investments and banking needs, a high-interest checking or savings account may make more sense that stashing your funds in a CMA.

The Takeaway

CMAs are interest-earning alternative solutions to traditional banking accounts like checking and saving accounts. Since investment firms usually offer CMAs, you can keep your investments and banking needs in one place, streamlining your money management efforts. As with most services, there are pros and cons to these accounts. Determining whether one is right for you will depend upon your reviewing all the features and seeing what is the best fit for your money management style and goals.

If you feel more comfortable with traditional banking, SoFi offers a smart, money-savvy solution. Our online bank accounts, when opened with direct deposit, are fee-free and earn a competitive APY. Also, you can access your paycheck up to two days earlier. We think it’s a great combination of convenience and money-growing features that you’ll love.

Ready to bank better? Come see what SoFi offers.

FAQ

What is the purpose of a cash management account?

Cash management accounts give consumers a way to complete everyday banking transactions like bill pay or direct deposit while managing investments, all under one roof.

What type of account is cash management?

A cash management account is like a traditional bank account, except it’s offered by non-banking firms, like online investment firms or robo-advisors. You can complete transactions (direct deposit, withdrawals, check writing, etc.) the same way with a traditional checking or savings account.

Is a cash management account the same as a money market account?

While cash management accounts and money market accounts have similar features (earning interest, withdrawals, deposits, etc.), they are not the same. Banks offer money market accounts, while nonbanks like robo-advisors offer cash management accounts.

Photo credit: iStock/MicroStockHub

1SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by banks in the SoFi Insured Deposit Program. Deposits may be insured up to $2M through participation in the program. See full terms at SoFi.com/banking/fdic/terms. See list of participating banks at SoFi.com/banking/fdic/receivingbanks.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Apr
14
2023
piggy banks pink and yellow background

Alternatives to Banks and Traditional Savings Accounts

By | Budgeting & Goals, Financial Independence | Comments Off on Alternatives to Banks and Traditional Savings Accounts

Increasingly, there are more and more alternatives to traditional banks and savings accounts. From fintech to mobile banking and money market funds to cash management accounts, you’ll have plenty of options to consider in the changing world of personal finance. Here’s a look at:

•  Alternative banking options, including money market accounts, cash management accounts, and more

•  The pros and cons of mobile banking

•  Credit unions vs. P2P lending vs. traditional banks.

Alternative Banking Options

Aside from the old-school savings and checking options offered at traditional banks, there are other options that allow you to save and withdraw cash.

Money Market Accounts

Money market accounts (MMAs), also known as money market deposit accounts (MMDAs), are a type of interest-bearing savings vehicle that was developed several decades ago. In general, these accounts offer relatively lower risk for investors than other types of investments because they are insured by the Federal Deposit Insurance Corporation. These accounts would typically offer higher interest rates than traditional savings accounts because the funds can be invested into government securities, certificates of deposit (CDs), and other vehicles. However, in today’s market, the gap is often not so great.

These accounts often combine features of a savings account and a checking account. For instance, if you are an account holder, you may or may not be limited to the number of monthly withdrawals you can make, which is standard with some savings accounts. However, you may also have a debit card, as you would with a checking account, to make transactions more seamless.

It’s worth noting that, even though they may sound alike, money market accounts and money market funds (a type of investment) are very different financial products.

Cash Management Accounts

A cash management account (or CMA) combines traits of a savings account with a checking account, allowing account holders to both save and spend. These accounts are typically offered by non-bank fintechs, such as online investment firms or robo-advisors. Rates can be competitive while allowing the account holder to make withdrawals as needed. This is in contrast to the types of accounts that limit transactions allowed per statement cycle.

Sometimes, checks are provided with cash management accounts. They may also come with debit cards and access to ATMs.

The funds are typically dispersed into accounts at banks where FDIC insurance keeps the money safe.

Alternative Options vs Traditional Savings Accounts

Here’s a quick look at how money market accounts and cash management accounts differ from traditional savings accounts.

Note: As you review these options, if you are interested in higher insurance limits, it’s worthwhile to note that some banks participate in programs that extend the FDIC insurance to cover millions.1

Money Market Account Cash Management Account Traditional Savings Account
May offer higher interest rates than traditional savings accounts. Often offered by non-bank financial service providers. They combine the attributes of traditional checking and savings accounts, offering competitive interest rates. Typically offered by traditional banks, traditional savings accounts may offer lower interest rates than money market accounts and cash management accounts.
May allow limited withdrawals each month using check or debit card. Users can make withdrawals as needed. Checks may be provided. Federal rules once limited withdrawals and transfers out of the account to six per month. That regulation has been suspended in response to the COVID-19 pandemic, though banks may still adhere to it.
Can be invested by the bank in government securities, certificates of deposit, and commercial paper, all of which are considered relatively low risk investments. Does not allow investing. Does not allow investing.
Money market accounts are FDIC insured up to $250,000. FDIC insured up to $250,000. FDIC insured up to $250,000.

Fintech

Fintech is short for “financial technology,” a term used to describe financial services with essential, integrated technology. Some forms have become so commonplace that users don’t necessarily even consider them as fintech. An example would be using a mobile payment app. When considering fintech vs traditional banking there may be other products that are more clearly alternative banking solutions. An example of this could be buying and selling cryptocurrency.

Besides mobile apps and cryptocurrency, other fintech examples may include:

•  Digital-only banks, meaning ones without brick-and-mortar branches

•  Artificial intelligence (AI), such as those used in chatbots to answer customer questions and with robo-advisors to help with investing

•  Biometric technologies that make it easier to log into apps while also providing additional security.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.20% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


Pros and Cons of Mobile Banking

Most traditional banks and credit unions offer mobile banking today as part of their services. Basically, mobile banking allows customers to check their balances and transactions online, deposit checks on their phones, and transfer funds digitally.

Because online-only banks typically don’t have physical branches, overhead costs can be lower for them. They may then pass those savings onto their customers, as well as often provide perks beyond those provided in a traditional bank. Here’s a look at some of the pros and cons of online banking:

Pros Cons
Higher interest rates: Reduced overhead can help online-only banks to provide more attractive interest rates. Lack of live assistance: Online-only banks commonly have a customer service line without offering personal banking services. This means that a customer will need to set up accounts and apply for loans without the ability to talk through any challenges with a banker.
No minimum balance: Traditional banks often require minimum balances in accounts, while many online-only institutions do not. Limited services: To help keep costs low and be able to provide higher interest rates, an online-only bank will often offer fewer services than traditional banks.
Convenience: Mobile banking institutions are open 24/7/365. All a customer needs is internet access. Limited ATM access: It may be more difficult to find ATMs within the network
ATM availability: Online-only banks often participate in ATM networks so that customers can use them at no cost. Or, online-only banks may instead refund ATM fees for a certain number of withdrawals.

Consumers who bank online should take appropriate precautions to avoid fraudulent activity. Online banking is very safe, but nothing is completely without issues in this era of hackers and scammers. Wise moves include not accessing private information on public Wi-Fi, not checking banking information on public computers, and using debit cards on protected sites only. These steps may help to reduce the odds of security-related problems with online banking.

Recommended: Is Mobile Banking Safe?

Credit Unions vs. Traditional Banks

When you’re looking for a place to open a checking or savings account or find loan products like a mortgage, credit unions can be an alternative to traditional banks. Here’s a look at how the two options compare:

Traditional Bank Credit Union
Banks are for-profit institutions that are owned privately or are publicly traded companies. Credit unions are nonprofits typically owned by its members.
Banking services are typically available to anyone with a good financial track record. Services may only be available to members or family members of the community that the credit union serves.
Banks may have more branches and ATMs available. Credit unions often partner with other institutions to make more bricks-and-mortar branches available and to increase the size of their ATM network.
Banks may offer a wider array of options for banking products. Other products, such as credit cards, may offer more perks. Credit unions often offer enhanced customer services and may be cheaper to use than traditional banks.

Peer-to-Peer Lending vs Traditional Banking

In recent years, peer-to-peer (P2P) lending has sprung up as an alternative to traditional bank loans. It’s a form of direct money lending that bypasses official financial institutions in which investors provide funds to would-be borrowers. Here’s a side-by-side look at the two forms of lending:

Peer-to-peer Lending Traditional Bank Loans
P2P lending matches borrowers and investors directly—typically through an online platform—without the use of an official financial intermediary, such as a bank. Borrowers apply for a loan from a bank.
Borrowers fill out an application with the platform which assesses risk and credit rating before providing loan options and interest rates. The bank assesses borrowers’ creditworthiness and determines whether or not to provide a loan and appropriate interest rates.
Loans may be more accessible to those with low credit scores or looking for atypical loans Banks may offer a limited number of loan products and may have few options available to individuals with poor credit.
Loans may offer lower interest rates or lower fees due to higher competition between investors.

Switching Bank Accounts

If you’re happy with your current traditional bank and bank accounts, you may be content to stay put. However if you’re unsatisfied or looking for tools that aren’t available at your bricks-and-mortar bank, then there may be reasons to switch bank accounts. Here are some questions to ask yourself and reasons you might want to make a change.

•  Fees: Review what’s being charged, from minimum balance and maintenance fees to significant overdraft fees and more. If they’re adding up at a current bank, it may be worth researching alternative banking solutions to see if fees are similar or perhaps even less than what’s currently being charged.

•  Customer service: How long does it take for an issue to be resolved, such as a fraudulent withdrawal? During what hours is the customer service line available? Are you currently being treated as a valued customer?

•  Life event: Is a wedding or other kind of partnership in the near future? This may be a time to open a joint account. See if your current financial institution offers the right features for you and your partner.

•  Convenience: Is the brick-and-mortar bank branch location inconvenient, perhaps after a move? Do ATMs come with hefty fees? Can you conduct all the transactions you want to with your mobile device?

•  FDIC insurance: Is your current bank FDIC-insured or is your current credit union NCUA-insured? Are there any other safety and security concerns with that financial institution? Insurance can provide peace of mind.

•  Mobile features: Are more features available at an alternative banking choice that are of interest? This could mean mobile check deposits, reimbursement of ATM fees, overdraft forgiveness, or a more user-friendly online portal.

How Many Bank Accounts Should You Have?

If a person decides to open an alternative bank account, does it still make sense to hang on to whatever traditional accounts they may already have? The short answer is that the number of bank accounts a person maintains is an individual decision. There may be benefits to having multiple accounts, but it’s also more to juggle.

Reasons it makes sense to have multiple accounts can include:

•  Having separate accounts for different purposes; for example, one savings account could be earmarked for emergencies, while another might contain funds being saved for a down payment on a house or for college expenses.

•  Couples may decide they like the idea of having separate accounts as well as one for joint expenses.

•  Freelancers and small business owners may want to separate personal banking from business banking.

Challenges associated with maintaining multiple accounts can include:

•  The risk of overdraft

•  More banking fees

•  More logistics involved to manage them all.

If more than one bank account is open, it can be important to find out how to transfer funds from one account to the other, as needed. If all of the accounts are held at the same institution, most banks have simple procedures to set up transfers, such as ones from a checking account to a savings account. This can often be done by filling out a form. Or, this can often be done through an ATM.

If bank accounts are held in different financial institutions, the information needed to complete a transfer will typically include routing numbers and account numbers. Banks may have slightly different procedures.

Recommended: How Many Bank Accounts Should I Have?

The Takeaway

There are many different ways to manage your money today, including whether you keep it with a traditional bank, a credit union, or an online bank or other kind of fintech. You’ll also have options like a standard savings account vs. a cash management account vs. money market account. Understanding the options available and the pros and cons of each will help you make the best decision for you. There usually isn’t a right or wrong choice, but an option that checks more of the boxes on your wishlist. It’s up to you!

If you’re in the market for a bank that offers competitive interest rates and no fees, take a look at what SoFi offers for online bank accounts. When you open our Checking and Savings with direct deposit, you’ll enjoy a competitive APY and pay no account fees. Plus, we offer a network of 55,000+ fee-free ATMs to make banking that much better.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.20% APY on SoFi Checking and Savings.


1SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by banks in the SoFi Insured Deposit Program. Deposits may be insured up to $2M through participation in the program. See full terms at SoFi.com/banking/fdic/terms. See list of participating banks at SoFi.com/banking/fdic/receivingbanks.

SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Apr
14
2023
What Is IntraFi Network Deposits?

What Is IntraFi Network Deposits?

By | Budgeting & Goals, Financial Independence, money | Comments Off on What Is IntraFi Network Deposits?

IntraFi Network Deposits is a banking network that allows customers to deposit more than $250,000 and have the funds be FDIC-insured. The FDIC (or Federal Deposit Insurance Corporation) offers $250,000 of deposit insurance for most bank customers in the event that the bank fails. This applies per depositor, per institution, per ownership category.

While this may be more than enough for many people, individuals with very high net worths or businesses may have the need for additional FDIC insurance on larger sums. For those in that situation, there are an array of strategies to get the insurance coverage needed for peace of mind.

One option is to use IntraFi Network Deposits. This allows you to work with one bank which facilitates your money being spread between multiple institutions to make sure that you remain under the FDIC limit. Here, learn more about this process by diving into:

•   How does IntraFi Work?

•   What steps do you take to use IntraFi?

•   What are alternatives to IntraFi?

How Does IntraFi Work?

IntraFi Network Deposits (previously known as CDARS or ICS) is a network that links many of the largest banks and financial institutions in a shared network. If you have more than $250,000 in savings accounts or certificates of deposit in an investment plan, you might want to consider using the IntraFi network. It can help you bank your money while maintaining FDIC insurance.

You create an account with one custodial bank in the network. Think of that bank as managing your relationship with others, because they spread your total deposit amount out over multiple different financial institutions.

Your funds are split up into multiple accounts of $250,000 or less, each fully FDIC-insured, at various institutions, with IntraFi Network acting as your hub. This can be a valuable solution for high net-worth individuals as well as businesses.

Think about the big picture: Most investors want to make sure that they are investing in safe accounts; ones that are unlikely to lose value. There are, of course, various ways to accomplish this. Security is one reason you might look at how CDs compare to bonds, for example. IntraFi Network Deposits is an avenue for those who appreciate a consolidated approach to investing large sums of money and enjoying FDIC insurance.

FDIC Limits

The FDIC is an independent agency of the United States government, tasked with insuring bank depositors against a bank failure. FDIC deposit insurance guarantees that money up to $250,000 per depositor.

If you have more than that to invest, you might consider spreading out your money to different institutions. This will help make sure that all of your money is protected. You can also look into another option: Some banks participate in programs that extend the FDIC insurance to cover millions1.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.20% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


Using IntraFi Deposits

IntraFi Network Deposits can be thought of as your one-stop shop for dividing your money into separate, fully insured accounts. Read on to learn how exactly this organization functions to help make this process easier for you.

Participating Banks

The first thing that you will want to do to use IntraFi Deposits is to find a participating bank. Most of the largest banks in the country belong to the IntraFi network, including 84% of the largest banks in the country. You shouldn’t have a problem finding a network bank that will fit your needs. Check with your current bank or other ones in your area, if you like, or use a search engine to locate one. Found one you are ready to bank with? This is called your custodial bank.

Deposit Funds

Once you’ve found a participating bank, the next step is to complete the required paperwork and then deposit funds (say, by transferring money from another bank account). Even though your funds will be spread throughout several different financial institutions, you will always work directly with your custodial bank. You will deposit funds through that one bank, and they will set the interest rate that you’ll earn on all your funds across the network.

Your custodial bank will be responsible for separating your money into FDIC-insured accounts, each of $250,000 or less, and managing them.

Track Your Funds

Your custodial bank is responsible for verifying your identity, accepting your deposits, and handling all communication with you. How certificates of deposit work with IntraFi is similar to how it would work if you only had an account with one bank. You will receive regular statements from your custodial bank, just as if you had an account directly and only with them.

If you have questions about which financial institutions your money is invested in, you can track that information through your custodial bank and the bank statements they issue.

Is IntraFi Safe?

Savvy investors are concerned with which investments have the lowest level of risk. While no investment is 100% safe in all situations, the IntraFi Network has been tested with billions of dollars over its lifetime. In addition, it has been endorsed by the American Bankers Association.

How Much Does the IntraFi Service Cost?

IntraFi Network Deposits does not charge a fee directly to consumers who take advantage of the service. You will choose a product and a rate directly with the custodial bank that you elect to sign up with. That rate and product will determine your total return on investment (ROI).

How Many Banks Participate in the IntraFi Network?

Nearly all of the biggest banks in the United States participate in the IntraFi network. The IntraFi network includes more than 3,000 financial institutions, representing around 50% of the total banks in the country. Of the banks in the network, 95% are community banks, and 66% of minority-owned banks are members. This means it should be fairly simple to find a participating bank that works for you.

Alternatives to IntraFi Network Deposits

Of course, there’s the possibility that IntraFi Network Deposits doesn’t align perfectly with your needs and goals. If you have more than $250,000 in funds that you want to deposit so it’s FDIC-insured, there are other options to consider, listed here.

Open an account with a bank that offers higher insurance limits

As briefly noted above, some banks participate in programs that extend coverage to millions. This can be a convenient option for some individuals.

Open accounts with multiple banks

One alternative to using the IntraFi Network Deposits program is to just open accounts with multiple banks yourself. You would just need to keep the total amount at less than $250,000 per ownership category, per institution.

While this does give you more control, it also increases potential headaches as you try to track all of your money manually. Another possible negative is that you may not be able to get the highest rates with every financial institution. Deciding how many bank accounts to have is a personal decision, depending on your money style and your goals.

Open different types of accounts

FDIC insurance covers up to $250,000 per depositor, per FDIC-insured bank, per ownership category. One way to enjoy that FDIC coverage when you have more than $250,000 to deposit is by opening up different categories of accounts. There are a number of different types of account ownership categories, including such options as:

•   Single accounts

•   Joint accounts

•   Revocable trust accounts

•   Irrevocable trust accounts

•   Certain retirement accounts

•   Employee benefit plan accounts

Check with your financial institution to see if this might work for you as an IntraFi alternative.

Accept the risk of bank failure

You do also have the option to keep all of your money in one bank account, even above the $250,000 FDIC limit. This can involve taking on a substantial risk however. If that bank fails, you may lose any money held by the bank above the FDIC limit. This really boils down to a matter of your personal comfort level.

The Takeaway

If you have more than $250,000 in funds that you want to invest in a savings, money market, or certificate of deposit account, you may want to spread your money out to make sure that it is all FDIC-insured. FDIC insurance will cover $250,000, but beyond that, you may well need a solution. One way to do this is through the IntraFi Network Deposits program, which will divide your money into separate accounts that are fully insured. They can simplify this money management process for you and help you enjoy more peace of mind.

If you are looking for a bank that is a member of the IntraFi Network, SoFi can help. What’s more, SoFi recently announced that deposits may be insured up to $2 million through participation in the SoFi Insured Deposit Program. But even if you have much less money to stash, online banking with SoFi can also be a great choice. When you set up our Checking and Savings with direct deposit, you’ll enjoy a competitive APY and you’ll pay no account fees.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.20% APY on SoFi Checking and Savings.

FAQ

Are IntraFi accounts safe?

While no investment can be guaranteed as 100% safe in all situations, the IntraFi Network Deposits program has been tested with thousands of depositors and billions of dollars over the years.

How do you use IntraFi?

Whether you are creating an investment plan for a child or want to invest a large amount of money for another reason, using IntraFi is very straightforward. First, find a participating bank and complete the required paperwork. Then, you will make your deposits, and your funds will be placed into CDs or deposit accounts with other banks in the network. Your custodial bank will send you periodic statements with the details of your activity.

What is the interest rate for IntraFi?

IntraFi does not set the interest rate on deposits. Instead, it is your custodial bank that sets the interest rate for the total amount deposited. Whether you have a no penalty certificate of deposit or any other type of account, the interest rate will be up to your custodial bank. You will also receive your statements and other correspondence from the bank where you made your initial deposits.

Photo credit: iStock/fizkes

1SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by banks in the SoFi Insured Deposit Program. Deposits may be insured up to $2M through participation in the program. See full terms at SoFi.com/banking/fdic/terms. See list of participating banks at SoFi.com/banking/fdic/receivingbanks.

SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Mar
30
2023
How to Use the Fear and Greed Index To Your Advantage

Guide to the Fear and Greed Index

By | Growing Wealth, invest, Investing | Comments Off on Guide to the Fear and Greed Index

What Is the Fear and Greed Index?

The Fear and Greed Index is a tool developed by CNN (yes, the news network) to help gauge what factors are driving the stock market at a given time.

If you’ve ever taken a look at how the market is doing on a given day and wondered just what the heck is going on, the Fear and Greed Index may be helpful in deciphering the overall mood of the markets, and what’s behind it.

CNN’s Fear and Greed Index attempts to track the overriding emotions driving the stock market at any given time — a dynamic that typically toggles between fear and greed.

The Index is based on the premise that fear and greed are the two primary emotional states that influence investment behavior, with investors selling shares of stocks when they’re scared (fear), or buying them when they sense the potential for profit (greed).

CNN explains the Index as a tool to measure market movements and determine whether stocks are priced fairly or accurately, with the logic that fear drives prices down, and greed drives them up, or is used as a signal of when to sell stocks.

There are specific technical indicators used to calculate the Fear and Greed Index (FGI), and strategies that investors can use to inform their investment decisions based on the Index.

Understanding the Fear and Greed Index

The Fear and Greed Index uses a scale of 0 to 100. The higher the reading, the greedier investors are, with 50 signaling that investors are neutral. In other words, 100 signifies maximum greediness, and 0 signifies maximum fear.

To give some historical context, on Sept. 17, 2008, during the height of the financial crisis, the Fear and Greed Index logged a low of 12. On March 12, 2020, as the pandemic recession set in, the FGI hit a low of 2 that year.

Seven different types of stock indicators are used to calculate the Fear and Greed Index.

CNN tracks how much each indicator has veered from its average versus how much it normally veers. Then each indicator is given equal weighting when it comes to the final reading. Here are the seven inputs.

1.    Market Momentum: The S&P 500 versus its 125-day moving average. Looking at this equity benchmark relative to its own history can measure how the index’s 500 companies are being valued.

2.    Stock Price Strength: The number of stocks hitting 52-week highs and lows on the New York Stock Exchange, the largest of the world’s many stock exchanges. Share prices of public companies can signal whether they’re getting overvalued or undervalued.

3.    Stock Price Breadth: The volume of shares trading in stocks on the rise versus those declining. Market breadth can be used to gauge how widespread bullish or bearish sentiment is.

4.    Put and Call Options: The ratio of bullish call options trades versus bearish put options trades. Options give investors the right but not the obligation to buy or sell an asset. Therefore, more trades of calls over puts could indicate investors are feeling optimistic about snapping up shares in the future.

5.    Junk Bond Demand: The spread between yields on investment-grade bonds and junk bonds or high-yield bonds. Bond prices move in the opposite direction of yields. So when yields of higher-quality investment-grade bonds are climbing relative to yields on junkier debt, investors are seeking riskier assets.

6.    Market Volatility: The Cboe Volatility Index, also known as VIX, is designed to track investor expectations for volatility 30 days out. Rising expectations for stock market turbulence could be an indicator of fear.

7.    Safe Haven Demand: The difference in returns from stocks versus Treasuries. How much investors are favoring riskier markets like equities versus relatively safe investments or assets, like U.S. government bonds, can indicate sentiment.

The Fear and Greed Index page on the CNN website breaks down how each indicator is faring at any given time. For instance, whether each measure is showing Extreme Fear, Fear, Neutral, Greed, or Extreme Greed among investors.

“Stock Price Strength” might be showing Extreme Greed even as “Safe Haven Demand” is signaling Extreme Fear.

Tracking the Fear and Greed Index Over Time

The Fear and Greed Index is updated often — CNN says that each component, and the overall Index, are recalculated as soon as new data becomes available and can be implemented.

Looking back over the past several years, the Index has tracked market sentiment with at least some degree of accuracy. For example, prior to the COVID-19 pandemic, the market was seeing a bull run and hitting record levels — the Index, in late 2017, was nearing 100, a signifier that the market was driven by greed at that time.

Conversely, the Index dipped into “fear” territory (below 20) during the fall of 2016, when uncertainty was on the rise due to the U.S. presidential election at that time. Note, too, that midterm elections can also affect market performance.

How Does the Fear and Greed Index Fare Against History?

As mentioned, the Index does appear to capture investor sentiment with some degree of accuracy. The past few years — which have been rife with uncertainty due to the pandemic — showed pockets of fear. For example, the Index showed “extreme fear” among investors in early 2020. That was right when the pandemic hit U.S. shores, and absolutely devastated the markets.

However, over the course of 2020, and near the end of the year, the Index was scoring at around 90, as the Federal Reserve stepped in and large-scale stimulus programs were implemented to prop up the economy.

Interestingly, the Index then dipped down into the “fear” realm in late 2020, likely due to uncertainty surrounding the outcome of the U.S. presidential election. It likewise saw a fast swing toward “greed” in the subsequent aftermath.

Again, these largely mirror what was happening in the markets at large, and economic sentiment.

How Does the Fear and Greed Index Fare Against Other Indicators?

While the Fear and Greed Index does fold several indicators into its overall calculations, it is more of an emotional barometer than anything. While many financial professionals would likely urge investors to set their emotions aside when making investing decisions, it isn’t always easy — and as such, investors can be unpredictable.

That unpredictability can have an effect on the markets as investors may panic and engage in sell-offs, or conversely start buying stocks and other investments. Ultimately, it’s really hard to predict what people and institutions are going to do, barring some obvious motivating factor.

With that in mind, there are other market sentiment indicators out there, including the American Association of Individual Investors (AAII) Sentiment Survey, the Commitment of Traders report published by the CFTC (one of several agencies governing financial institutions), and even the U.S. Dollar Index (DXY), which can be used to measure safe haven demand. They’re all a bit different, but attempt to capture more or less the same thing, often with similar results.

For instance, while the Fear and Greed Index showed a state of fear in mid-March, the AAII Sentiment Survey likewise showed a majority of investors with a “bearish” sentiment as well during the same time frame.

And, of course, there are a number of other economic indicators that you can use to inform your investing decisions, such as GDP readings, unemployment figures, etc.

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Dos and Don’ts of Using the Fear and Greed Index

Why is the Fear and Greed Index useful? The same reason that any sort of measurement or gauge has value. In this case, measuring sentiment can help you determine which move you want to make next as an investor, and help you ride investing trends to potentially bigger returns.

Are you being too greedy? Too fearful? Is now the time to think about herd mentality?

Also generally, some investors often try to be contrarian, so when markets appear frothy and the rest of the herd appears to be overvaluing assets, investors try to sell, and vice versa.

💡 Recommended: Should I Pull My Money Out of the Stock Market?

Dos

Use the Index to realize that investing can be emotional, but it shouldn’t be.

You can also use it to determine when to enter the market. Let’s say, for instance, you’ve been monitoring a stock that becomes further undervalued as investor fear rises, that could be a good time to buy the stock.

Don’ts

Don’t only rely on the Fear and Greed Index or other investor sentiment measures as the sole factor in making investment decisions. Fundamentals — like how much the economy is growing, or how quickly companies in your portfolio are growing revenue and earnings (which will be apparent during earnings season) — are important.

For instance, the FGI may be signaling extreme greed at some point, with all seven metrics indicating a rising market. However, this extreme bullishness may be warranted if the economy is firing on all cylinders, allowing companies to hire and consumers to buy up goods.

💡 Recommended: Using Fundamental Analysis on Stocks

What Is the Crypto Fear and Greed Index?

While CNN publishes and maintains the traditional Fear and Greed Index, there are other websites that publish a similar index for the cryptocurrency markets.

The Crypto Fear and Greed Index operates in much the same way as CNN’s Index, but instead, focuses on sentiment within the crypto markets. The Crypto Fear and Greed Index is published and maintained by Alternative.me.

The Takeaway

The Fear and Greed Index is one of many gauges that tracks investor sentiment, and CNN’s Index focuses on seven specific indicators to measure whether the market is feeling “greedy” or “fearful.” While it’s only one indicator, in recent years, it has served as a somewhat accurate barometer of the markets, particularly regarding major events like elections and the pandemic.

But, as with anything, investors shouldn’t rely solely on the Fear and Greed Index to make decisions, though it can be used as one of many tools at their disposal. As always, it’s best to check with a financial professional if you have questions.

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FAQ

Is the Fear and Greed Index a good indicator?

It can be a “good” indicator in the sense that it can be helpful when used in conjunction with other indicators to make investing decisions. That said, it shouldn’t be the only indicator investors use, and isn’t necessarily going to be accurate in helping determine what the market will do next.

Where can you find the Fear and Greed Index?

The Fear and Greed Index is published and maintained by CNN, and can be found on CNN’s website.

When does it make sense to buy, based on the Fear and Greed Index?

While you shouldn’t make investing decisions solely based on the Fear and Greed Index’s readings, generally speaking, the market is bullish when the Index produces a higher number (greed), and is bearish when numbers are lower (fear).

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