Allocating your funds to diversified investment strategies is a key way to increase your net worth. You might invest in stocks or bonds, or you might keep your funds in a money market account. Building your net worth by investing requires that you set aside a certain amount of money to fund your accounts or purchase stocks and bonds. If this seems a bit too complicated and you are looking for an effortless way to invest your cash, a money market sweep account could be the right choice for you.
TL;DR (Too Long; Didn't Read)
A money market sweep account provides investors with the option to automatically "sweep" cash accumulating in your brokerage account due to dividend earnings or stock sales directly into a money market account.
Definition of a Money Market Account
A money market account is a type of savings account offered by banks, credit unions and other financial institutions. The main difference between a money market account and a traditional savings account is the interest rate paid on your money. Money market accounts are high-yield savings accounts and the interest you earn on your principal is greater than a traditional account. This means you can grow your net worth faster.
Money Market Sweep Accounts
A money market sweep account offers a convenient and simple way to reinvest your money. When you sell stock or earn dividends on the investments in your portfolio, your brokerage firm holds this cash in an account until you reinvest the funds. With a money market sweep account, any cash that accumulates in your account is automatically “swept” into a money market account. You earn interest on this money until you decide to reinvest it.
Exploring Checking Accounts
If you have a checking account with a bank or credit union, this institution might allow money market sweeps on your funds that exceed a target balance. This is another effortless way to grow your funds. With a checking account money market sweep, you set a target balance for your checking account, and once your money exceeds this balance, the excess funds are swept into a money market account. For example, if you set a target balance of $25,000 and you now have $27,000 in your checking account, the bank sweeps $2,000 from your checking account and places it into your money market account.
Additional Important Considerations
Money market accounts are generally a safe investment, but the amount of money you earn can fluctuate because the interest is based on a floating rate. For this reason, some money market accounts perform better than others do. Rather than rely on your brokerage firm or bank to choose your money market account, take a proactive approach and ask your broker or bank to provide several options. Research the average return on each of these money market accounts over the past year, and then choose the account that will offer the highest return on your money.