How to decide whether to put money in savings or in your brokerage account

Don’t make the wrong choice when it comes to investing your money.

Key points

• If you have extra cash, you’ll need to decide how best to use it.
• You can save it or invest it by placing it in a brokerage account.
• You should consider your goals for the funds and your timeline when deciding what is best.

When you have spare money that you don’t plan to spend, you’ll have to decide what to do with it. Generally, keeping it in your checking account isn’t the best idea because money kept in your checking account is likely to be spent on day-to-day expenses and you’ll be better off if you use your reserve money to improve your financial situation.

If you’re not going to keep the money in a checking account, putting it in a savings account is one of your options, and depositing it in your brokerage account for investment is another choice. There are pros and cons to both, so you’ll need to ask yourself a few key questions to determine which is best.

Will you need money soon?

To decide whether you want to put money in a brokerage account or a savings account, you must first determine whether you will likely need the funds soon. Indeed, it is generally not a good idea to invest money that you will potentially need in a few years.

If you put your money in savings, you can access the funds whenever you need them. The money will be safe in your account as long as you choose an FDIC-insured bank. And you can withdraw the funds quickly and easily if an expense arises, either by transferring the money directly to your checking account and using it to pay for necessary expenses, or withdrawing it from an ATM if your bank allows it. .

When you put your money in a brokerage account, on the other hand, you will likely invest it. And if you invest it, you may not want or be able to access it right away.

If you purchased assets such as CDs or bonds, you may need to commit to leaving the money invested for a period of time. And if you buy stocks or ETFs, you may find that the value of your invested funds declines if a market correction occurs or economic conditions turn sour.

If you’ve made smart investments, you should be able to get your money back and make a profit even if you suffer temporary losses, but waiting for a recovery can take time. If you have invested the money you need soon, you are taking a very big risk of having to sell at a loss if you don’t have time to wait for the market to recover. You probably don’t want to take that chance.

Can you afford to lose it?

You also need to consider whether you can afford to lose the money you are putting aside. If you put it in savings, it won’t happen. But if you put the money in a brokerage account and invest it, there’s always a risk of loss, although it’s a small risk when you’re making wise long-term investments.

Taking a risk by investing your money in a brokerage account can make sense because you can get a higher return on invested funds than on savings money. But it’s not a good idea to take a chance on money that you absolutely can’t afford to lose.

What are your goals for the funds?

If you need money to meet a short-term financial goal, like buying a house in a year, a savings account is probably the best place for it. But if you want to grow your money to help you build wealth over time, a brokerage might be a better choice.

As mentioned above, you can generally get higher returns if you invest rather than putting your money in a savings account, as savings account interest rates are currently relatively low. In fact, even many high-yield savings accounts typically pay less than 1%, which is well below the current rate of inflation.

By considering these questions, you can decide where your hard-earned money should go. You can make an informed choice and feel confident about depositing your funds in a brokerage or savings account, and it will hopefully be a decision you won’t regret.