Deciding where to put your money is very important because there are different kinds of accounts that make sense for specific situations. The wrong choice could end up costing you, which is unfortunate since it's often difficult to decide what's best for each dollar.
For most people, a savings account and a brokerage account are two options that you'll have to decide between at some point in your life. If you're in this situation and aren't sure which is right for you, here are a few key questions that you should ask yourself to help you decide.
Do I want to keep my money safe or maximize my potential return?
Brokerage accounts and savings accounts are designed for different purposes.
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Savings accounts are meant to keep your money safe and accessible. As long as you choose an FDIC-insured savings account and keep your balance below FDIC insurance limits (most often $250,000 per account), you can't possibly lose your money in a savings account. But the potential returns you can earn are limited.
Although some savings accounts offer rates above 5.00% right now, the national average rate is still 0.47% for all savings accounts. The current 5.00% rates are also driven by today's unusually high interest rate environment and aren't likely to last for the long term.
With a brokerage account, things are different. You put money into a brokerage account to invest. And there's a risk of losing money when you do that. Of course, you could potentially earn a lot too. It's reasonable to expect 10% average annual returns if you put your money into an index fund tracking the S&P 500 (a financial index made up of around 500 large U.S. companies). If you buy individual stock shares and make good investments, you could earn much more than that.
Think carefully about whether you're willing to take on more risk with the money for a greater potential reward. If you are OK with possibly losing some of your cash in exchange for a good chance of earning a generous return on your investment, then a brokerage account is a better choice. If it's critical you have the money -- say, because it's for a down payment for a home you're buying soon -- choose a savings account.
When will I need the money?
Your timeline for needing the money also matters. That's because solid investments usually perform well over the long haul. For example, check out the chart below of the performance of the S&P 500. In some years it goes way up, but in others way down. So while you should make 10% on average over many years, you could easily lose money if you invest it and have to take it out soon and you have bad timing.
As a general rule, unless you can leave the money invested for around two to five years, it should be in savings instead of a brokerage account. Otherwise, the risk is too high that you'll end up buying and selling at a bad time before you make enough profits to break even.
Where are my other assets?
Finally, you should think about where most of your money is. If you already have a lot of cash in savings but very little invested, then it may be time to take a chance on the market. If you have a ton of money invested, though, and very little liquid cash in a savings account, diversifying into savings could be a good idea.
As a good rule of thumb, you should subtract your age from 110 and put that percentage of your portfolio into stocks and the rest into safer investments like bonds, CDs, and even high-yield savings accounts.
By considering these issues, you can make the right choice about whether money should go into savings or into a brokerage account. You can have an asset allocation that makes sense for you and that helps set you up for a more secure future.
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FAQs
As a general rule, unless you can leave the money invested for around two to five years, it should be in savings instead of a brokerage account. Otherwise, the risk is too high that you'll end up buying and selling at a bad time before you make enough profits to break even.
Is it better to put money in a savings or brokerage account? ›
Brokerage accounts and savings accounts serve different purposes, so which one you need depends on your goals. It's not uncommon to have both types. Brokerage accounts are usually for investing, while savings accounts are for building a nest egg — whether in the short or long term.
Should I put my money in a savings account or stock market? ›
Saving is generally seen as preferable for investors with short-term financial goals, a low risk tolerance, or those in need of an emergency fund. Investing may be the best option for people who already have a rainy-day fund and are focused on longer-term financial goals or those who have a higher risk tolerance.
Why should no one use brokerage accounts? ›
If the value of your investments drops too far, you might struggle to repay the money you owe the brokerage. Should your account be sent to collections, it could damage your credit score. You can avoid this risk by opening a cash account, which doesn't involve borrowing money.
Is a brokerage account better than a bank account? ›
Brokerage accounts often carry higher risks and costs, but much higher earning potential. On the flip side, savings accounts bring certainty and immediate access to all of your funds at a moment's notice.
What is the downside to a brokerage account? ›
Brokerage accounts don't offer all the services that a traditional bank offers. Brokerages might not offer additional products such as mortgages and other loans. Brokerages may not have weekend or evening hours.
How much cash should you keep in a brokerage account? ›
“When we build a financial plan for clients, we tend to be a little bit more conservative, because we believe managing risk is important,” says Verhaalen. Verhaalen often recommends clients maintain a cash reserve that's, at a minimum, the equivalent of six months of income.
What is the 50 30 20 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
Should I keep all my savings in the stock market? ›
When it comes to saving and investing, time matters. Money you need soon generally shouldn't be in the stock market. The money you're investing long-term — such as for retirement — probably shouldn't be in a plain old savings account.
How much money should I keep in savings vs investing? ›
invest? How much to put toward savings versus investing depends on your current needs and your future goals. If you're unable to cover three to six months' worth of expenses with savings, it's best to prioritize that before beginning to invest for long-term goals like retirement.
Millionaires use brokerage accounts for low-cost index funds. “Buying and holding index funds in a brokerage account, it's possible to keep and grow wealth over the long term,” according to Business Insider.
Should you keep all your money in one brokerage account? ›
If you're saving for a single goal, then sticking to one brokerage account could be your best bet. That way, you'll have a handle on all of your money and it will be easy to keep tabs on your investment portfolio.
Should I keep money in brokerage account? ›
A brokerage account. Uninvested cash from this type of account earns interest and is available for investing or managing expenses. Holding cash here is appropriate if you plan to spend the money within a few days or would like to quickly place a trade.
Is my money safer in a bank or brokerage? ›
A bank account is typically the safest place for your cash, since banks can be insured by the Federal Deposit Insurance Corp. up to $250,000 per depositor, per insured institution, per ownership category. Banks that are insured by the FDIC often say “Member FDIC” on their websites.
Do you pay taxes on brokerage accounts? ›
Brokerage accounts are taxable accounts
The act of opening a brokerage account doesn't mean you'll be on the hook for additional taxes. However, investment income within a brokerage account — the profits from selling your investments — is subject to capital gains taxes.
Should I keep more than 500000 in a brokerage account? ›
Is it safe to keep more than $500,000 in a brokerage account? It is safe in the sense that there are measures in place to help investors recoup their investments before the SIPC steps in. And, indeed, the SIPC will not get involved until the liquidation process starts.
Is it better to put money in savings or money market account? ›
Money market accounts usually pay a little bit more interest with around 0.66% (though you may find some with higher rates). But there are also high-yield savings accounts that can earn you over 4% in interest (that's 10 times more than the average!).
What is better savings account or investment account? ›
Savings are ideal for short-term or unexpected expenses such as holidays or the boiler breaking down. But if you're looking to build your wealth for the future, it's worth considering investing because stock markets tend to perform better than cash over the longer-term.
Should I keep more than 500k in a brokerage account? ›
They must also have a certain amount of liquidity on hand, thus allowing them to cover funds in these cases. What this means is that even if you have more than $500,000 in one brokerage account, chances are high that you won't lose any of your money even if the broker is forced into liquidation.
