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A sweep account is a process that actually involves more than one financial account. An account process of this type can be extremely efficient when it comes to managing the flow of cash between an account that is used to make disbursements and an account where cash is allowed to accrue on investments. The sweep account strategy is employed by many banks and other financial institutions, and is often offered as a service to individual and small business customers.
The process of establishing a sweep account begins with the creation of a cash account. This account is the one that will be used to issue disbursements, such as paying utility bills, outstanding invoices to various vendors, and any other necessary expense. Once the cash account is in place, the customer and a financial analyst will determine the average amount that the customer wishes to maintain in the account. This figure is usually enough to cover monthly expenses without creating any type of financial hardship for the customer.
When there are funds available above and beyond this average balance, those funds are automatically transferred into an investment account of some type. For example, an individual may set an average balance for his or her checking account, and authorize any funds over that amount to be automatically transferred by the bank into a Certificate of Deposit, or a money market. This allows the funds to begin earning a return, thus increasing the net worth of the customer.
In the event that the funds in the cash account fall below a certain level, it is possible as part of the sweep account strategy to liquidate some of the investments made as part of the process. These funds are then used to replenish the depleted cash account. This can be done with relative ease, and provides the customer with the security of knowing there will always be funds on hand to handle necessary disbursements.
In the best of economic situations, the sweep account is an excellent way to build a solid portfolio of assets that provide an enhanced measure of financial security for the customer. As long as the return on the invested funds can stay ahead of any liquidations necessary to maintain the cash account properly, the assets will continue to grow. During less prosperous economic periods, it may be necessary to liquidate more of the investments to maintain the average balance, a situation that can quickly lead to little or no return on the remaining investments. When this occurs, the financial institution will usually work with the customer to develop an alternative strategy to maximize the best use of his or her assets until the sweep account strategy becomes feasible once more.
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