Roll your own Cash Management Account

Back in the late 1970s, Merrill Lynch, and then several competitors, created what became known as a Cash Management Account. I really wanted one.

Basically, a Cash Management Account was a brokerage account wrapped around a money market fund and an associated credit card.

It was really aimed at high-value customers. The sort who might make discretionary purchases in the $10,000 range. The sort who wouldn’t want to have multiple tens of thousands of dollars sitting around in cash just in case a few of those purchases might end up being made in the same month. For those customers, a key feature was that the brokerage account was a margin account.

You had an American Express card tied to your account. You could charge whatever you wanted, just like on any other AmEx card. At the end of the month the account would automatically pay the balance on the card. You also had a checkbook that you could use to pay your bills. If either kind of transaction drained the cash out of your account, you’d automatically get a margin loan against your investments. Margin loans were at a preferred rate (because they were secured).

At your own convenience, informed by knowing when more cash would be flowing into your account (dividends on your stocks, interest on your bonds, transfers from the trust your daddy set up for you), you could either let the margin loan be paid off by incoming cash, or else decide to sell some asset or another.

For someone with liquid assets in, let’s say, the million dollar range, it was really very convenient. For someone with much less than that it was less useful, but to keep out the riffraff (people like me), they required a minimum initial investment of $20,000.

By the time I had the money to buy into an account like that, it’s advantages had pretty much been rendered moot by modernization in the financial industry. Now you can roll your own cash management account easily enough.

Here’s what I do:

Have a local bank account for checking and a debit/ATM card. (Nowadays it wouldn’t have to be local, but I like having access to a local branch for teller services, a safety deposit box, etc.)

Have an internet bank for a high-yield savings account.

Have a brokerage account for investments.

Have a credit card.

I have these accounts connected so that I can transfer money between them via the Automated Clearing House (ACH).

I make my local bank the center of everything: All deposits and all payments flow into and out of that checking account. Any time that adds up to surplus money, I transfer the funds to my internet bank to pick up the extra yield, or else to my brokerage account to be invested.

It’s basically exactly like a cash management account, except that I don’t have paying the credit card automated. (Actually, since I originally drafted this post, I’ve gone ahead and automated paying my credit cards. We went on vacation back in July and August, and were going to be out of town right when the bills could be expected, and not back home until after they needed to be paid. So, now almost all of my bills, finally, are paid automatically. I now live in, I don’t know, 2005 or thereabouts.) Oh, also: my brokerage account isn’t a margin account. (It could be, but the whole preferential rate structure for margin loans faded away some years ago, so there’s no point.)

If there’s something about a formal Cash Management account appeals to you, pretty much any bank, brokerage firm, or mutual fund company offers them now, often with no minimum investment. But there’s really no point.

Currently the ACH takes 2–3 days to move money, but the infrastructure for same-day payments (called FedNow) is now in place. Soon enough a few banks and brokerage firms will make it available to customers to distinguish themselves, and either the others will quickly fall in line, or I’ll move my money to the more enlightened institutions.