What suits you?
Here’s how to decide if a brokerage account or a money market account is a better place to park your money and earn a return.
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Brokerage accounts and money market accounts each serve a unique need. One is better for savings you can afford to put away for years, while the other is a great way to earn a predictable and reliable interest rate on money you can access anytime. moment.
Here’s the ins and outs of brokerage accounts and money market accounts, and how to decide which is right for you.
Brokerage Accounts Explained
A brokerage account is used to buy risky assets – things like stocks, bonds, mutual funds and ETFs – ideally to hold them for years at a time. For example, you can set up an IRA with a discount broker to set aside money for possible retirement, or a taxable brokerage account to supplement your savings in an IRA and 401(k) you have at work.
Brokerage accounts are the best way to buy long-term investment assets, but they offer little, if any, benefit for the money you might need in the medium term. Money that you might need to access in the not-too-distant future (emergency funds to protect against job loss, for example) is best kept in cash. And brokers pay little or nothing for the money you keep in your account.
When should you use a brokerage account
A brokerage account is a good choice in certain circumstances where you have money that you can afford not to touch for long periods of time. If the following statements apply to you, you are probably a good candidate for a brokerage account:
You can afford to take risks — A brokerage account is one of the best ways to buy investments, including stocks, bonds and funds. These investments generally offer higher returns than risk-free or low-risk alternatives (like money market accounts), but with a higher risk of loss.
You save for the long term — A brokerage account is best when you have money you can afford not to touch for five years or more. For example, US equities have been a great investment over long periods of time. Over all 20-year periods, US stocks have generated returns above inflation, helping investors get richer over time. However, it’s anyone’s guess how it will perform over the next month or even next year. Since 1928, US stocks have returned about 10% a year, but about one in three years returns have been negative. Putting money on the market for just one year is more of a gamble than an investment.
You want tax benefits — Setting up an IRA by opening a brokerage account can provide you with some serious benefits when tax time arrives. The contributions you make to a traditional IRA are now tax deductible, but you will pay taxes on your retirement withdrawals. In contrast, contributions to a Roth IRA are not tax deductible, but when you withdraw money in retirement, you will not be taxed at all on what you withdraw.
The most important thing to remember about brokerage accounts is that they are just a container for investments. A brokerage account does not generate returns – stocks, funds, bonds, etc. that you hold inside generate the return. When you open a brokerage account, you have the power to choose your own investments, choosing from tens of thousands of stocks, bonds and funds.
Money Market Accounts Explained
From your perspective, a money market account works the same way as a high-yield savings account, with two major exceptions: money market accounts generally pay a higher interest rate and often come with a checkbook for those occasional times when you might need to make a payment on demand. The money market account designation is more important to how the bank manages its customers’ money, but it does not affect you in any way.
Here are three things that make up a money market account:
Limit of six transactions per month — Just as savings accounts are generally limited to six transactions per month, money market accounts work the same way. An MMA is not for people who want to use the account as a checking account – you will exceed the monthly transaction limit, incur fees and potentially have your account terminated.
Higher minimum balance requirement — There are exceptions, of course, but as a general rule, most money market accounts require you to maintain a higher average monthly balance than a checking or savings account. Part of the reason banks are willing to pay a higher rate on money market accounts is that their MMA customers are expected to hold higher balances.
Higher interest rates — In today’s competitive banking environment, banks are using savings and money market accounts to win over different customers. It is not uncommon to see banks positioning their savings accounts for people who want more services – access to ATMs, branch networks, etc. – while marketing money market accounts to clients who care almost exclusively about getting the highest interest rate. The best money market accounts pay rates several times higher than normal savings accounts at your average banking institution.
When should you use a money market account
A money market account can be a great savings tool for money you plan to use over the next few years or money you can’t afford to risk in pursuit of higher returns. Often, money market accounts offer the highest possible interest rate you can earn on your money without taking on risk or dealing with added complexity. You get all the convenience of a savings account with rates well above the average interest rate paid on savings accounts.
If the following statements apply to you, a money market account may be right for you:
You can’t afford to take risks — A money market account is a great way to get a relatively high guaranteed return on your money, making it a good place to keep your emergency fund or any excess cash you might need at a some time in the next few years. Money market accounts are FDIC insured up to $250,000, so even if the bank goes bankrupt, you won’t lose your money. For this reason, you can consider money market accounts as a way to get a guaranteed return on your money.
You want high returns — Of all the consumer accounts you can open at a bank, a money market account ranks up there with a certificate of deposit (CD) to offer the highest returns on your money. Unlike a bank CD, however, a money market account lets you withdraw at any time without penalty, which is great when you want high rates. and the ability to actually use your money whenever you want.
You can keep a big balance — Money market accounts generally require a higher balance and may charge monthly fees if you do not maintain a certain minimum account balance. It is not uncommon for money market accounts to require minimum balances ranging from $2,500 to $10,000 or more.
The main feature of a money market account is that as long as you have less than $250,000 in an FDIC-insured money market account, you never have to worry about losing money. If you put $10,000 into a money market account right now and refrain from withdrawing the money, your balance will only increase each month as interest is deposited into the account.
That said, a money market account won’t make you rich, as most money market accounts pay a rate roughly equal to or slightly below the rate of inflation. Therefore, a money market account is not a good way to save for long-term goals like retirement or sending your kids to college. These are two purposes that brokerage accounts are best suited for.
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