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What are the different types of cash management accounts? what and the pros and cons?

What are the different types of cash management accounts? what and the pros and cons?

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Expert Solution

  • Checking account. This is the most basic and useful type of bank account. It is designed to have an unlimited number of deposits and withdrawals (though each one may be subject to fees), and does not allow for interest to be paid on any residual balance in it. There is not usually a restriction on the amount of cash held in a checking account, nor on how long it must be held. Special types of checking accounts include:
    • Interest-bearing account. There are variations on the checking account concept that are interest bearing. However, they have more restrictions that a standard checking account (such as a maximum number of check payments to be issued each month), and may require a minimum balance.
    • Zero balance account. This account is funded only enough to meet the requirements of checks being presented for payment. By keeping the funded balance low, a company can keep most of its cash in an interest-bearing investment.
  • Savings account. There are a number of variations on the savings account concept, but the basic idea is that it is a store of cash; thus, no or few checks are written against the account. Depending on the type of savings account, there may be restrictions on the minimum amount of cash held in the account, as well as on the minimum time period over which the cash must be held in the account. Several variations on the savings account concept are:
    • Certificate of deposit. This requires a fixed deposit amount that the bank holds for a specific period of time, in exchange for a somewhat higher interest rate.
    • Money market account. This account offers slightly higher interest rates in exchange for more restrictions on withdrawing funds from the account.
    • Individual retirement account (IRA). This account stores funds that an individual is setting aside for his or her retirement. Funds placed in these accounts are tax-advantaged in different ways, depending on the type of IRA that has been set up.

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