What is a Sweep Account?
A sweep account is like a special bank or brokerage account. When your account has more money than usual, it takes the extra cash and moves it to a different account that pays more interest, kind of like an investment account.
This account works by connecting different banks or financial institutions and moving your money between them in a set way. It helps you keep a steady amount of cash in your regular account for bills and moves the extra money into an investment account where it can earn more interest.
The bank takes care of your accounts and statements and invests the extra funds in the money market. If you need the money, you can easily liquidate it. You can also choose to get advice from the bank or make your own investment decisions. Usually, people like putting their extra money in an investment account because it can make more money, but there are some risks involved with the returns.
How does Sweep Account work?
Sweep accounts serve the purpose of moving additional money into a money market account, where it can generate more interest compared to a regular bank account. Besides, these accounts can operate in reverse, with the bank transferring funds from an investment account to a checking account when the balance in the checking account sinks below a specific verge.
Additionally, sweep accounts can also be utilized for repaying loans rather than earning interest. The process mirrors what was explained earlier, except that instead of the bank or brokerage account directing surplus funds into an investment account, any extra money in your checking account goes towards settling loan payments. This approach can simplify the process of clearing off debts.
Example of Sweep Account
Saroj has an auto sweep account with a threshold limit of ₹50,000. The interest rate on her checking account is 3%. On the 1st of the month, she starts with a balance of ₹40,000, which is below the threshold limit.
Since her current balance is less than the threshold limit of ₹50,000, the money remains in her checking account and earns the regular interest rate of 3%.
On the 10th of the month, Saroj receives an amount of ₹1,20,000, increasing her balance to ₹1,60,000, which is above the threshold. I.e., the surplus amount exceeding ₹50,000, which is ₹1,10,000, automatically gets transferred to an investment account, where it will accrue interest at a higher rate.
On the 20th of the month, she needs to make a ₹60,000 payment for a home improvement project. Her checking account balance is now ₹1,00,000. Luckily, her investment account balance of ₹1,10,000 remains untouched.
On the 25th of the month, Saroj decides to make a withdrawal of ₹90,000 from her account for a vacation. However, her checking account balance is insufficient to cover the entire withdrawal. In this case, the sweep account reverses ₹50,000 from her investment account back into her checking account to complete the withdrawal