Should Your Money Be in a Brokerage Account or Savings Account? Here's How to Decide
If you have money to save or invest, it can be difficult to decide where it belongs. Asking yourself these questions will give you the answers you need.
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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.
| Year | Annual Percentage Change |
|---|---|
| 2023 | 13.98% |
| 2022 | (19.44%) |
| 2021 | 26.89% |
| 2020 | 16.26% |
| 2019 | 28.88% |
| 2018 | (6.24%) |
| 2017 | 19.42% |
| 2016 | 9.54% |
| 2015 | (0.73%) |
| 2014 | 11.39% |
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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