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.
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.
FAQs
If you think you will need the money in the near-term (less than two to three years), avoid investing it because of the additional risk you take on by putting your money in the market. Instead, put this cash into a savings account that offers more security.
Should I keep my money in a savings account or brokerage account? ›
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 putting money in a brokerage account a good idea? ›
For example, if you want to buy a house with cash or save up a very large down payment, a brokerage account might be a good option if you plan to save for about five years. But for savings goals that will take less than five years, you might want to use a regular savings account or a money market account.
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.
Should I keep money in savings or money market account? ›
Money market accounts offer flexibility with check-writing and debit cards, savings accounts are more accessible and have lower fees, and CDs offer higher interest rates but with a commitment to keep your money locked away for a set period of time. To make the best choice, consider your financial goals and situation.
What is the downside to a brokerage account? ›
Brokerages tend to offer lower annual percentage yields (APYs) on savings, money market and interest checking accounts than the best online banks. Brokerages typically don't have cash-handling employees in brick-and-mortar locations. Brokerage accounts don't offer all the services that a traditional bank offers.
Should I keep more than 500k in a brokerage account? ›
It's OK to invest more than $500,000 through a good investment company. Just make sure that you pick a company that offers low fees.
Why should no one use brokerage accounts? ›
Drawbacks of a Brokerage Account
The stock market can be volatile. Whenever you put your money into the market, there is no guaranteed return on your investment. No tax breaks for contributions or withdrawals.
Do millionaires use brokerage accounts? ›
According to Business Insider's Hillary Hoffower, index funds are a favorite of millionaires and high-net-worth individuals for their low cost. They are even favored by investors like Warren Buffett. By buying and holding index funds in a brokerage account, it's possible to keep and grow wealth over the long term.
What is a good amount to have in a brokerage account? ›
“Ideally, you'll invest somewhere around 15%–25% of your post-tax income,” says Mark Henry, founder and CEO at Alloy Wealth Management. “If you need to start smaller and work your way up to that goal, that's fine.
Saving provides a safety net and a way to achieve short-term goals, while investing has the potential for higher long-term returns and can help achieve long-term financial goals. However, investing also comes with the risk of losing money.
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.
Should I move my savings into stocks? ›
If you think you will need the money in the near-term (less than two to three years), avoid investing it because of the additional risk you take on by putting your money in the market. Instead, put this cash into a savings account that offers more security.
What does Dave Ramsey recommend for savings? ›
Ramsey's general recommendation in his Baby Steps has long been to start with having $1,000 saved in a starter emergency fund. If you earn under $20,000 a year, the post on Ramsey Solutions said you may adjust this amount to $500.
Does Dave Ramsey recommend money market accounts? ›
I suggest a Money Market account with no penalties and full check-writing privileges for your emergency fund.
How much will $10,000 make in a money market account? ›
According to FDIC data, the average money market account earns 0.64% APY. However, the best money market accounts currently offer APYs of around 5.00% or higher. If you deposit $10,000 into one of these high-yield accounts, you would earn $513 or more in interest over a year, assuming daily compounding.
Is your money safer in a bank or a brokerage account? ›
While bank balances are insured by the FDIC, investments in a brokerage account are covered by the Securities Investor Protection Corporation (SIPC). It protects investors in the unlikely event that their brokerage firm fails. However, certain rules and conditions apply—and investment earnings are not insured.
Is it safe to leave money in brokerage account? ›
Holding cash here is appropriate if you plan to spend the money within a few days or would like to quickly place a trade. Assets in your brokerage account are protected up to $500,000 per investor, including a maximum of $250,000 in cash by SIPC in the event a SIPC-member brokerage fails.
How much money should I keep in a brokerage account? ›
“Ideally, you'll invest somewhere around 15%–25% of your post-tax income,” says Mark Henry, founder and CEO at Alloy Wealth Management. “If you need to start smaller and work your way up to that goal, that's fine.
Where is the best place to park cash right now? ›
Places to Keep Your Short-Term Cash
CDs, high-yield savings accounts, and money market funds are the best places to keep your cash when it comes to interest rates. Treasury bills currently offer attractive yields at the lowest risk. Learn how they compare in terms of yield, liquidity, and guarantees.
