Brokerage vs High-Yield Savings Account: Key Differences

As you’re planning how to save for the future, you might compare brokerage accounts vs. high-yield savings accounts. Both types of accounts can potentially help you meet your savings goals, but they serve different purposes. 

A brokerage account tends to be better as an option for long-term wealth building, but it comes with higher risk. A savings account, on the other hand, is a low-risk option that’s typically better suited for an emergency fund and meeting short-term savings goals. 

Read on for a closer look at brokerage accounts and high-yield savings accounts to understand how they work and where they may fit in helping you achieve your financial goals. 

Understanding Brokerage Accounts and How They Work

Brokerage accounts allow people to purchase stocks, bonds, and other assets. These accounts may include individual retirement accounts (IRAs) and taxable brokerage accounts. 

• IRAs: IRAs are tax-advantaged accounts designed to help you save for retirement. You’ll get a tax break on your contributions and earnings, but you usually have to wait until you’re 59 ½ to withdraw your money without penalty. 

• Taxable brokerage accounts: People often invest in brokerage accounts if they have money left over after investing in a retirement savings account. These accounts don’t have the tax advantages of an IRA or employer-sponsored 401(k), but they allow people to purchase index funds, stocks, and other assets. 

Brokerage accounts may have a higher return than high-yield savings accounts, but it all depends on the market. Savings can rise and fall depending on the performance of the investments, and investing involves risk. It’s generally considered a good idea to invest over the long-term so money in the account may weather downs in the market. 

Recommended: Savings Account vs Roth IRA: Key Differences

When to Use a Brokerage Account

If you can set aside your money for a minimum of five years, you may want to consider a brokerage account. In the case of a retirement savings plan, it’s generally wise to leave it in the account until at least age 59 ½. 

A brokerage account requires being comfortable with a certain amount of risk. Some investments have less risk, such as Treasury bonds, while others have higher risk, such as individual stocks. 

An individual might choose to work with a financial advisor or opt for an account with a robo-advisor to find an investment strategy that aligns with their goals and risk tolerance. 

Tips for Picking a Good Brokerage Account

There are a wide variety of brokerage accounts to choose from today. As you’re comparing your options, consider the following features: 

• Fees and commissions. Find out about the fees, commissions, and any penalties that come with the account. If you’re only making a few stock trades per year, the charge per stock trade may not be a major expense.  

• Selection of funds. Make sure the financial institution you choose has a variety of funds that meets your savings goals. 

• Resources and support. If you’re new to investing,you may want to look for brokerage accounts that come with educational resources, tools, and support. For example, you might want to consider an account that comes with hands-on management from a financial advisor or a robo-advisor, which provides automated portfolio management.

• Account deposit minimums. Some accounts have no minimum deposits, while others have higher thresholds. 

Understanding High-Yield Savings Accounts and How They Work

High-yield savings accounts are similar to traditional savings accounts, but they offer better rates. While the average annual percentage yield (APY) on a traditional savings account is only 0.39%, high-yield savings accounts currently offer rates up to 4.21%. 

However, those rates can fluctuate up and down as the Federal Reserve adjusts rates. You won’t lose money that’s sitting in a savings account, though, and your savings are FDIC-insured for up to $250,000. 

With a savings account, you can generally deposit and withdraw money with no penalty. However, some banks may only allow six transactions per month before they charge a fee; check with your institution about their rules. You can use your debit card at an ATM to withdraw money, go to the bank in person, or transfer the money to a checking account. 

Many banks have no minimum deposit, making it easy to set up your high-yield savings account. You also have the option of setting up automatic transfers from a checking account if you want to automate your savings.

When to Use a High-Yield Savings Account

A high-yield savings account is a place to store your emergency fund and cash for short-term savings goals. It’s liquid, meaning you can withdraw cash when you need it. 

That doesn't mean you should keep the money for your monthly bills here — that’s probably better kept in your checking account. But if you’re saving up for a vacation or a new car, stashing it in your savings account makes sense. 

A high-yield savings account is low risk, but it’s not designed for long-term wealth creation. The returns may be lower than what you could get from investing your money. 

Recommended: What Is a Cash Management Account (CMA)?

Tips for Choosing the Right High-Yield Savings Account

Every financial institution offers its own rates and terms for high-yield savings accounts, so it’s worth comparing your options with multiple banks. Here are some features to keep an eye on: 

• APY. You can look for a bank that offers a high rate on your savings. Keep in mind that the rate is variable and could increase or decrease over time. 

• Minimum deposits. Find out if the bank requires you to make a certain minimum deposit to open your account. 

• Monthly fees. Keep an eye out for any fees that you may have to pay to maintain your account. Most banks don’t charge fees as long as you have a certain amount in your savings account. 

• Access to cash. Consider how easy it is to contribute to and withdraw from a high-yield savings account. It’s often easiest to keep your checking and savings accounts at the same bank for immediate transfers between the two. 

Brokerage Accounts vs High-Yield Savings Accounts

Brokerage accounts and high-yield savings accounts can earn a return on your money over time, but they have key differences and serve different purposes. Brokerage accounts allow you to invest in the market and are generally best for long-term investing of five years or more. 

Investing involves risk. It’s possible to lose money if the market is down, but an investor could potentially reduce risk by diversifying their portfolio and investing for the long haul. You typically won’t lose money in a savings account (it’s insured for up to $250,000), but it also won’t grow all that much over the long term. 

A savings account is a place to store an emergency fund and short-term savings. Extra cash you have above that could be directed to a brokerage account or retirement savings account for the future. 

Here’s a quick comparison of the brokerage and high-yield savings accounts:

The Takeaway

Both a brokerage account and high-yield savings account might have a place in your financial plan. First, focus on building an emergency fund in your savings account so you have liquid cash for unexpected expenses. 

Once you’ve saved your rainy day fund, consider saving in a retirement savings plan. After that, if you have additional money, you may want to explore the idea of opening a brokerage account. If you can invest your money over time, a brokerage account might help you meet your future financial goals.

If you’re interested in a savings account, Lantern by SoFi can help. With our online banking marketplace, it’s easy to compare high-yield savings accounts based on APY, fees, and balance minimums.

Explore high-yield savings accounts with Lantern by SoFi today!