Both brokerage and savings accounts can help you earn a return on the money you stash in them. However, there are some 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 deposit, what type of return you’re looking to get and how long you can keep the money in the account. Depending on your financial situation, speaking with a financial advisor might be your best option to help determine which direction to go.
Brokerage Accounts vs. Savings Accounts
A brokerage account is essentially an investment account through which you can purchase securities, such as stocks, mutual funds, bonds and more. A savings account is a banking vehicle that’s liquid and helps you earn interest, which is something a checking account can’t offer. According to federal law, savings accounts are restricted in the number of outgoing transactions you can have, which makes it best for those wanting to just keep cash on hand for a period of time, while still seeing some growth.
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A brokerage account has the potential to see huge returns at any given time, but nothing is guaranteed because of how volatile the investment market can be. On the other hand, a savings account won’t ever see major returns, but you’ll have the knowledge that the value of your account is never going to decline. The returns on a savings account are also always clear, meaning you can plan ahead for what you’ll earn.
Your savings account will have an annual percentage yield (APY) attached to it. This is the percentage of your deposited money that you’ll earn every year. For example, if you have $100,000 in your savings account with a 1% APY, you will earn $1,000 over your first year. Then the next year, you will 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 increase or decrease dramatically. This fluctuation is entirely dependent on your investments, both in terms of types and choices.
When to Use a Brokerage Account or a Savings Account
A brokerage account is likely the choice for you if you want to invest your money for the long or short term, with maximal gains being at the forefront of your mind. This way, you can select higher-yield investments in a diversified portfolio so you can save for your long-term goals, like retirement. For instance, if you feel comfortable setting aside your money for at least five years, then 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 is going to be and the liquidity of being able to withdraw the entire amount at any time, without penalty. That makes savings accounts a good fit for you if you just need a place to stash your cash or emergency fund, but don’t want it to earn nothing. There is no volatility with a savings account, though your APY could change from year to year depending on the financial institution that you choose and the larger rate environment in the country.
Ways to Use Your Brokerage Account Like a Savings Account
It’s possible to use your brokerage account similar to how you would use a savings account, though the returns could be less than if you invested riskier. You may find this helpful if you want to put your cash somewhere safe, while earning a little something extra than what a traditional or online savings account can provide.
Here are three ways you can use your brokerage account to cover your saving needs:
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Keep your cash in your brokerage deposit account: In other words, just don’t invest the money. You can earn on the money market fund, though the returns will be significantly less than a high-yield savings account and many brokers will require a minimum balance to do this.
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Set up an account with a robo-advisor: Many cash management accounts with robo-advisor apps, like Wealthfront or Betterment, will pay a return for your money to just sit in your account. You can expect a yield of 0.05% – 0.20%, depending on which you use.
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Buy short-term government-backed securities: You can buy an exchange-traded fund (ETF) or a money market mutual fund that makes short-term investments in government bonds. You’ll have to keep your money in the investment for anywhere between 30 days to one year, but you’ll often be able to earn a higher yield, similar to or slightly better than a savings account.
How to Choose a Brokerage Account
Brokerage accounts are typically used for either on-demand trading of securities or as an extra retirement vehicle. A normal retirement account, like a 401(k) or IRA, has a specific purpose and is much more restricted in how and when you can withdraw. However, they do feature incredibly important tax benefits, which makes brokerage accounts best served as ancillary retirement nest eggs.
When comparing the usefulness of a savings account to a brokerage account, you’ll probably want a traditional brokerage account. This will enable 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 just as it sounds, with the value of the cash or securities in it being the total dollar value that you can withdraw or trade. A margin account means you can borrow money to invest, but this isn’t the type of account that you’ll likely 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 a three important items to consider when looking for a new brokerage account:
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Commissions and trading fees: Every time you make a trade with your brokerage account, your broker may charge a fee or commission. If you plan on trading a lot, then this can add up quickly. However, many brokers charge no fees at all for stock and ETF trades, with bonds and options coming with marginal fees.
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Fund selection: The number of investment opportunities might be important to you if you have a lot of money to invest or if you’re 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 keep in your account at all times. If you’re just wanting to put your money into an account to earn a return while you wait to use it, then a no-minimum account will probably be very important to you.
Bottom Line
Both brokerage and savings accounts allow you to stash your money for the future. The right one for you is going to depend on how quickly you may need access to your funds and how much you’re wanting to potentially earn on that money in the short and long term. 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.
Tips on Saving for the Future
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Managing a savings or brokerage account can be difficult to do in the long run. If that’s the case with you, then you may want to speak to a financial advisor who can answer your questions. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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There are a lot of options when looking at savings accounts. That’s why we put together a collection of the best savings accounts available today, and we keep it up to date with the latest industry developments.
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Source: finance.yahoo.com