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Savings accounts and brokerage accounts both allow you to put money aside for a future date and earn a return on that money. However, these two accounts serve different purposes. A savings account enables you to earn a low yield and access your funds when you need them, with no potential for loss. A brokerage account, on the other hand, allows you to invest your money and potentially earn a much higher return but comes with risk. Which account to choose will depend on what you’re saving for and how long you have until you need the money. Here's how to decide whether to put your savings in a brokerage account or keep it safe in a savings account.
What Is a Savings Account?
A savings account is a deposit account designed for stashing money you don’t need to use right away (that’s what checking accounts are for). You can open a savings account at a variety of financial institutions, including commercial banks, credit unions, and online banks. Any money you deposit typically earns interest, so it can help your money grow over time. And, there’s no risk of losing your money, since these accounts are FDIC-insured up to $250,000 per account holder, per bank.A savings account can be ideal for short-term savings goals, like building an emergency fund, paying for a vacation, or accumulating a down payment for a home. However, even with a high-yield savings account (which generally offers a higher interest rate than a standard savings account), you won’t likely earn enough interest to outpace inflation. As a result, savings accounts are not well-suited to longer-term savings goals, like retirement or a child’s college education.
How Do Savings Accounts Work?
The interest on a savings account is expressed as an annual percentage yield (APY). The APY tells you how much interest you’ll earn over one year based on the balance, and this will vary from bank to bank. Online banks typically pay a higher APY than traditional brick-and-mortar banks.The funds in a savings account are generally less accessible than the funds in a checking account. Checks can’t be written against them, and you’re often limited to six withdrawals or transfers per month. If you exceed the bank’s transaction limit, you’ll likely be charged a fee.
Pros and Cons of Savings Accounts
Savings accounts are highly liquid. You don’t have to leave the money untouched for a specific time period (like you do with a certificate of deposit) or sell stocks in order to access your money. It’s also easy to transfer money from a savings account to a checking account, even if the checking account is held at a different institution.And, while savings accounts earn interest, there is no risk that you will ever lose your money, even if the bank goes belly up. Many other types of accounts require you to take risks to earn returns. Because savings accounts are so safe, however, they do not provide high returns. Some savings accounts also require a minimum initial deposit to open the account, as well as minimum balance requirements. If you fall below the threshold, you may not earn the expected APY and/or have to pay a fee. In addition, there are often limits to the number of withdrawals you can make per month, such as six or nine. Though the federal rule (called “Regulation D”) that limited you to six savings account withdrawals per month is no longer in place, many banks still enforce limitations.
What Is a Brokerage Account?
A brokerage account is an investment account you can open directly with a brokerage firm that lets you buy and sell investments with the money you deposit into the account. The firm places investment orders on your behalf and executes trades, and typically collects a commission.With a brokerage account, you have the option to invest in whatever you want — from stocks and mutual funds to bonds and exchange-traded funds (ETFs). Opening a brokerage account is one of the first steps to building your personal investment portfolio.Brokerage accounts are protected by the Securities Investor Protection Corporation (SIPC), which offers up to $500,000 in protection per brokerage account. So, if the brokerage firm goes under, you won't lose your money. This doesn’t protect you from losing money due to a bad investment, however.
How Does a Brokerage Account Work?
Many brokers allow you to open a brokerage account quickly online, and there is generally no minimum initial deposit. Once you deposit cash in a brokerage account, you can use the funds to purchase investment assets. You own the money and investments in your brokerage account, and you can sell investments at any time. The broker simply holds your account and acts as an intermediary between you and the investments you want to purchase.There are generally two main types of brokerage accounts you can choose from: full-service brokerage accounts, which come with some type of financial guidance, or an online brokerage account that you basically manage yourself or with help from a “robo-advisor.”
While brokerage accounts are considered liquid, the money in these accounts is invested, which means it’s tied up in individual assets. If you sell something, you may be able to reinvest it immediately. However, it can take some time before you can withdraw the proceeds as cash.
Pros and Cons of Brokerage Accounts
A brokerage account can be used to make investments, which stand to make a much higher return over the long term than you could earn from a savings account. In addition, there are no income or contribution limits with brokerage accounts, and they offer a variety of investment options. There is also no limit to the amount of brokerage accounts you can have, and investors can withdraw their money at any time.On the downside, returns on any investments you make are not guaranteed because of how volatile the investment market can be. And, unlike retirement accounts, which offer tax benefits, investors utilizing brokerage accounts generally pay taxes when they sell assets or when a stock pays dividends.Also, the money in your brokerage account that is invested isn't as readily accessible as the money sitting in a savings or checking account. This is because It can take a day or two after you sell an investment to gain access to the proceeds.
Brokerage Accounts vs. Savings Accounts
Brokerage accounts and savings accounts have some similarities but also a number of key differences. Here’s a closer look at how they compare.
Similarities Between Brokerage Accounts and Savings Accounts
Both brokerage accounts and savings accounts are easy to set up (you can often do it online) and can be linked to other accounts for easy transfers. In addition, both types of accounts allow you to keep your savings separate from your spending, while giving you an opportunity to earn a return on your money. In both cases, the money is accessible without paying a penalty.
Differences Between Brokerage Accounts and Savings Accounts
Brokerage accounts are designed for mid- to long-term sayings, while savings accounts are best suited for short-term savings, such as money you want to use in the next few months to a year.This is because the return on a savings account is generally small, but it is guaranteed, while the return on investments you make through a brokerage account can be large, but is not guaranteed. It’s even possible to lose money in a brokerage account, while you can’t lose any money in a savings account. While there are typically restrictions on how many times you can withdraw or transfer funds out of a savings account per month, there are no withdrawal limits on a brokerage account.Here’s a quick look at savings accounts vs. brokerage accounts:
Savings Account
Brokerage Account
Best for
Short-term savings
Mid- to long-term savings
Withdrawal limits
Generally six per month (depending on the bank)
None
Accessibility
Immediate
There may be a short delay if money is invested
Returns
Low, but guaranteed
Potentially high, but not guaranteed
Can You Use a Brokerage Account Like a Savings Account?
Yes, it’s possible to use your brokerage account like a savings account, though the returns will likely be less than if you used it as a long-term investment account. One way to use a brokerage account like a savings account is to keep some (or all) of the money in your brokerage deposit account as cash rather than investing it. Many brokerage accounts offer a money market fund for any cash sitting in the account, allowing it to earn some interest. The interest rate, however, may be lower than what you could earn in a high-yield savings account.
Another way to use a brokerage account like a type of savings account is to buy an ETF or a money market mutual fund that makes short-term investments in government bonds. You’ll likely 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 high-yield savings account.
The Takeaway
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.Which account you should choose will depend on 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, you may want to have both accounts as part of your savings portfolio.
3 Money Tips
Checking accounts are ideal for everyday transactions but earn little to no interest. Savings accounts are better for storing and growing your money — they earn higher interest but often restrict how many withdrawals you can make per month.
To get into the savings habit, consider having a certain percentage of your paycheck directly deposited into your savings account. Or, set up a small automatic recurring transfer from your checking account into your savings account on the same day each month.
To set up a simple monthly spending budget, consider the 50/30/20 rule. This involves splitting your after-tax income into three categories of spending: 50% on needs, 30% on wants, and 20% on savings. This is just one budget option.
Frequently Asked Questions
What are some disadvantages of keeping money in a brokerage account?
Is money safer in a brokerage account or a bank?
How much money do most keep in a brokerage vs. savings account?
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Photo credit: iStock/damircudic
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About the Author
Caroline Banton
Caroline Banton is a finance and business writer whose work has appeared on sites such as The Huffington Post, Investopedia, The Motley Fool, LendingTree, MSN, and Time. With an MBA from Johns Hopkins University, Caroline has written for fintech companies, acted as a career coach, and ghost-written for prominent thought leaders in the financial industry.
