Brokerage accounts and savings accounts can help you get more out of the money you store there. However, there are major differences in how they work. When comparing brokerage accounts and savings accounts, it’s important to consider things like how much money you’ll be depositing, what kind of return you want, and how long you can hold the money in the account. Depending on your financial situation, speaking with a financial advisor might be your best option to help you determine which direction to take.
Brokerage accounts vs savings accounts
A brokerage account is basically an investment account through which you can buy securities, such as stocks, mutual funds, bonds, etc. A savings account is a banking vehicle that is liquid and helps you earn interest that a checking account cannot. By federal law, savings accounts are limited in the number of outgoing transactions you can make, which is best suited for those who simply want to keep cash in hand for a while, but still see a some growth.
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A brokerage account has the potential to generate huge returns at any time, but nothing is guaranteed due to the volatility of the investment market. On the other hand, a savings account will never see significant returns, but you will know that the value of your account will never decrease. The returns from a savings account are also always clear, meaning you can plan ahead what you will earn.
Your savings account will come with an annual percentage yield (APY). This is the percentage of your deposited money that you will earn each year. For example, if you have $100,000 in your savings account with an APY of 1%, you will earn $1,000 in your first year. Then the following year, you’ll earn 1% of your then $101,000, assuming you don’t deposit anything else.
Your brokerage account can’t guarantee anything and the value of what you invest could go up or down significantly. This fluctuation is entirely dependent on your investments, both in terms of types and choices.
When to use a brokerage or savings account
A brokerage account is probably the choice for you whether you want to invest your money for the long term or the short term, with maximum gains at the forefront of your mind. This way, you can select higher-yielding investments from a diversified portfolio so you can save for your long-term goals, like retirement. For example, if you feel comfortable setting aside your money for at least five years, a brokerage account is probably the way to go.
The two major advantages of a savings account are the certainty of knowing exactly what your return will be and the liquidity of being able to withdraw the entire amount at any time, without penalty. This makes savings accounts a good choice for you if you just need a place to store your cash or emergency fund, but don’t want it earning nothing. There is no volatility with a savings account, although your APY may change from year to year depending on the financial institution you choose and the broader country rate environment.
Ways to use your brokerage account as a savings account
It is possible to use your brokerage account the same way you would use a savings account, although returns may be lower than a riskier investment. This can be useful if you want to put your money in a safe place, while earning a little something extra compared to what a traditional or online savings account can provide.
Here are three ways to use your brokerage account to cover your savings needs:
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Keep your money in your brokerage deposit account: In other words, just don’t invest money. You can earn on the money market fund, although the returns will be significantly lower than on a high yield savings account and many brokers will require a minimum balance to do so.
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Create an account with a robo-advisor: Many cash management accounts with robo-advisor apps, like Wealthfront or Betterment, will pay a return so your money just stays in your account. You can expect a return of 0.05% to 0.20%, depending on which one you use.
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Buy short-term government-backed securities: You can buy an exchange-traded fund (ETF) or money market mutual fund that makes short-term investments in government bonds. You’ll need to hold your money in the investment for between 30 days and a year, but you can often get a higher, similar, or slightly better return than a savings account.
How to choose a brokerage account
Brokerage accounts are typically used for on-demand securities trading or as a supplemental retirement vehicle. A normal retirement account, like a 401(k) or an IRA, has a specific purpose and is much more restricted in how and when you can withdraw. However, they have incredibly significant tax advantages, which makes brokerage accounts better served as an ancillary retirement nest egg.
When you compare the usefulness of a savings account to a brokerage account, you’ll probably want a traditional brokerage account. This will allow you to withdraw or change your investments at any time.
When opening a traditional brokerage account, you can choose between a cash or margin account type. A cash account is as it looks, with the value of the cash or securities in it being the total dollar value you can withdraw or redeem. A margin account means you can borrow money to invest, but it’s not the type of account you’re likely to want if you need to keep cash on hand.
Choosing where to open your brokerage account can depend on a number of factors. Here are three important things to consider when looking for a new brokerage account:
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Commissions and trading fees: Each time you transact with your brokerage account, your broker may charge a fee or commission. If you plan to trade a lot, this can add up quickly. However, many brokers charge no fees for trading stocks and ETFs, with bonds and options having marginal fees.
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Selection of funds: The number of investment opportunities can be important for you if you have a lot of money to invest or if you are not yet sure where you want to invest your money. A financial advisor can help you determine the types of investments that will benefit you, but you may want to find a brokerage account that has access to as many mutual funds as possible.
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Account minimums: Many brokerage accounts will require certain account minimums to be maintained in your account at all times. If you just want to put your money in an account to get a return while waiting to use it, an account with no minimum will probably be very important to you.
Conclusion
Brokerage and savings accounts allow you to set aside your money for the future. The right one for you will depend on how quickly you need to access your funds and how much you potentially want to earn from that money in the short and long term. Brokerage accounts often come with higher risks and costs, but much higher earning potential. On the other hand, savings accounts offer certainty and immediate access to all your funds at any time.
Tips for saving for the future
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Managing a savings or brokerage account can be difficult to do in the long run. If this is your case, you may want to speak to a financial adviser who can answer your questions. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
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There are many options when it comes to savings accounts. That’s why we’ve put together a collection of the best savings accounts available today, and keep it up to date with the latest industry developments.
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