Sweep Program – Earn from Idle Money in your Bank Account

Sweep Program or a Sweep Account or Cash Sweeping is a type of account with a bank or a brokerage house. In such an account, the financial institution decides the minimum amount needed to be kept in that account. And any amount beyond the set limit is automatically transferred to a higher interest-earning account, usually daily. And, if any time the amount falls short in the regular account, the financial institution or bank transfers or “sweep” funds back to the regular account.

How Cash Sweep Works?

For example, suppose you have a sweep account with the sweep number (minimum amount) as $3000. It means that anytime the balance in your regular account exceeds $3,000, the extra amount will automatically get transferred to the account that gives you a higher interest rate.

We can say the sweep program is a type of money management technique. It ensures that idle money is earning extra money. Moreover, you don’t need to do anything more to make additional returns in terms of interest, etc.

Usually, banks or brokerages employ the sweep program. This program studies the use of a customer’s account and then sweeps and deploys the funds into a higher interest-bearing investment. The financial institution or bank ensures that the amount in sweep funds remains highly liquid, besides offering a higher interest as well. The liquidity of these investments is achieved by investing in short-term certificates, money market mutual funds, and more.

Types of Sweep Programs – Personal and Business

Sweep accounts could be personal sweeps, as well as business sweeps.

Personal sweeps are usually for individual investors. Here brokerages use sweep accounts of the investor to invest idle money available in t account. This unused money could be dividends, receipts from sell orders, or new cash deposits. Brokerages sweep this money into a higher interest-bearing account until the investor decides on a new investment. Also, brokerages may sweep the amount until they process a transaction on behalf of the investor.

Business sweeps are especially useful for small businesses, which depend on the daily cash flows. These businesses set a minimum balance for their checking account. And any amount over and above is moved to the higher interest-earning account. Such facilitation helps the company maximize its earning potential without compromising on liquidity. It means that if any time the business needs money or the balance in the checking account goes below the set amount, the bank sweeps the money back from the investment account.

Does This Attract Any Fee?

Even though the sweep program is a useful feature, you must not forget that it is not entirely free of cost. Those who open sweep accounts must know that their investment will be subject to a fee. This fee could either be a flat fee or a percentage of the investment. Betterment, for instance, charges an annual management fee of 0.25%.

It means that the more return you make the more you will have to pay in the form of fees. Though there is nothing wrong with paying the cost, you must ensure that the charge does not eat away your earnings from the investment.

Thus, you must be aware of the charges before you put money in the sweep account. You must compare those charges with the expected return to ensure that your earnings are positive.

Sweep Program

Whether Sweep Account Are Insured?

Yes, the majority of the sweep accounts are FDIC insured. It means your money enjoys a certain level of protection. However, whether or not your sweep account is insured depends upon the type of account you use. For instance, FDIC protects those accounts where money sweeps to savings accounts or money market deposit accounts.

But, not all your money gets protection. Usually, FDIC offers up to $250,000 of insurance for an individual. However, some financial institutions get you more FDIC cover by making sweeps to more financial institutions or banks.

How Much Money to Keep in a Sweep Account?

If you have a large amount of idle money, then keeping it all in the sweep account is not the best idea. The point is you may earn even more return by investing the money in other financial instruments.

On the other hand, keeping a large sum of money in the sweep program could prove useful in the long run. You might not earn a higher income from such an account in the short run. But, over the long term, the return from the sweep account could be higher.

Additionally, keeping a large sum of money in the sweep program also makes sense if you expect the market to drop going ahead. Thus, selling your other investments and putting the proceeds in the sweep account would not only keep your money safe but will also allow you to invest once the market gets normal quickly.

On the other hand, if you expect the market to move up, then you will be better off by investing in other financial instruments.

Robo Advisors and Cash Sweeping

The ever-changing technology is making it very easy how we invest.  Robo Advisors are the latest trend in the financial world, and financial institutions actively use them for the sweep program as well.

For example, Betterment, which is amongst the largest Robo advisors, came up with a “Two Way Sweep” option for the savings account a couple of years back. This Two Way Sweep works the same way as the business sweeps we described above. This means, it sweeps money to and fro from the investment account as per the needs.

Talking of how Betterment’s Robo advisors manage the account, they first study your checking account for spending habits. The system determines if your account has enough cash to meet your needs for the next 21 or 35 days. Robo advisors calculate the amount that you will need for the set days. And, if your account has more money than you need, the Robo advisors sweep the extra cash to investments that could help you earn more interest.

Final Words

A sweep program or account is perfect for those who don’t have much time to invest their extra money or those who don’t have much idea about investments. For instance, it is a good option for millennials, who have student loan debt and stagnant income. Such users may find it challenging to get money to invest.

In all, they are an excellent financial tool to earn some additional income without doing anything. The only thing you need to ensure is the fee you pay does not make your earnings negative.

Sanjay Borad

Sanjay Bulaki Borad

MBA-Finance, CMA, CS, Insolvency Professional, B'Com

Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

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