As the line between brokerage accounts and bank accounts continues to blur, it’s important for savers to remember that they don’t have to move their money into bank accounts to get the safety and returns of a bank account. Savers can achieve similar types of low-risk returns offered by traditional banks and banking products without ever leaving their brokerage accounts.
As brokerage accounts and bank accounts begin to look more alike, savers can often do many of the same things in each account. In brokerage accounts, not only can you invest in stocks, bonds and funds, you can often use the account as an omnibus financial account. In other words, you can write checks and pay bills with your account, often while collecting interest, too.
What is a brokerage account used for?
A brokerage account is an account used to buy and sell publicly traded investments such as stocks, bonds, mutual funds and exchange-traded funds (ETFs). Other types of securities, such as derivatives, may also be available for trade, depending on the brokerage.
Brokerages usually offer several types of accounts, such as taxable brokerage accounts, retirement accounts and trust accounts. These accounts can be used for a variety of purposes, including everything from long-term investing to day trading.
Brokerages often provide a variety of resources, such as research tools and educational materials and budgeting apps.
How to use a brokerage for your savings needs
1. Keep your deposit in cash at your broker
Savers can stash their cash in a brokerage and rack up interest in a money market fund, though it may be minimal these days. Typically brokerages sweep any excess cash into a basic money market account, allowing you to collect some extra coin.
For example, TD Ameritrade offers 0.01 percent on balances in an account backed by the Federal Deposit Insurance Corp., meaning it’s protected up to $250,000. Meanwhile, Charles Schwab offers an FDIC-insured account for investors with a 0.05 percent yield.
Those options aren’t bad, though they don’t get you a whole lot more interest than a basic checking account at one of the largest banks. But if you look around at the top online savings accounts, you can find some offering a better rate right now.
2. Buy an ETF of short-term government bonds
If you want to get your whole account balance working at an even higher rate, then you might consider buying an exchange-traded fund (ETF) comprised of short-term federal government bonds.
These ETFs offer a yield that’s in line with short-term interest rates, and the bonds in the fund are short-term, typically less than a year in duration. (Shorter-term bonds are lower-risk due to less exposure to interest rate risk.) The bonds are backed by the federal government, meaning the bonds have virtually no chance of defaulting. You may still, however, lose money because of market fluctuations.
If you’re interested in this kind of investment, you can purchase it just as you would a stock or other security, by placing an order with your broker using the fund’s ticker symbol. You’ll pay a fee called an expense ratio based on how much you have invested in the fund. However, it may not make sense for every investor, given low interest rates, how much you plan to buy and how long you plan to hold it.
For example, one such fund is the Goldman Sachs Access Treasury 0-1 Year ETF (GBIL). The fund tracks short-term interest rates, so as they rise and fall, the return on the fund does as well. About three-quarters of the fund’s bonds mature in less than six months, and since they’re U.S. bonds, they’re considered as safe as an investment gets.
The downside is that currently the fund’s expense ratio of 0.12 — or about $12 annually for every $10,000 invested — is more than the interest you’ll earn on the assets, at about 0.06 percent. And this fund is generally reasonably priced, but interest rates simply aren’t high enough now.
A fund is a better option when rates are higher than they are today. ETFs can be turned into cash any day the market is open, though settlement typically takes two to three business days.
3. Buy a money market mutual fund
Going with an ETF is one way to use funds to make your brokerage account look like a bank account. Another way is buying a money market mutual fund backed by bonds of the federal government. Both accomplish similar goals with similar (very limited) risks. So you might opt for a money market mutual fund, or otherwise choose it when access to an ETF isn’t available.
The money market mutual fund usually has a lower expense ratio — a beneficial trait in the current low-rate environment, especially when the other option is a short-term Treasury ETF.
Like the ETF bond fund, this kind of money market mutual fund invests in very short-term bonds of the federal government, typically with an average maturity of 30 to 60 days. So the fund tracks short-term rates, and as they rise and fall, the fund’s yield will change as well. Again, these bonds are backed by the federal government, so they have virtually no chance of defaulting. Still, you are not guaranteed to not lose money.
One example of a money market mutual fund is the Vanguard Federal Money Market Fund (VMFXX). As of July 2021, it offered a yield of 0.01 percent, and the average maturity of a holding was just 39 days. The fund charges an expense ratio of 0.11 percent, or a cost of $11 annually for every $10,000 invested.
Like those short-term ETFs, the expense ratio may be higher than the interest rate today, making this a better choice when rates are higher. But you can transform this fund into money any day the market is open.
If you’re interested in this kind of investment, you can purchase it as you would any mutual fund. That means there’s typically a minimum investment for the initial purchase — the Vanguard fund has an initial minimum of $3,000, for example — but then you can add to your position incrementally. Again, look for a low expense ratio so that you can keep more of that interest in your own pocket.
4. Buy a brokered CD
If you’re looking for a high-yield savings option from within your brokerage, consider turning to a certificate of deposit. Yes, you can buy a brokered CD from your brokerage account. A brokered CD is like a bank CD in that it pays a contractually guaranteed rate of interest. In other respects, a brokered CD differs from a bank CD, especially in how it is bought and sold.
A brokered CD has several key differences that any prospective investor should know. Brokered CDs can be purchased as a new issue through an online brokerage, and will usually have a small commission charge. They’re typically available with a minimum investment of $1,000 and are available in $1,000 increments. Some brokered CD products may not offer FDIC protection, so it pays to check first before buying.
If you need to close the CD for some reason, you’ll have to sell it into the market, like you would with a bond or stock. Therefore, you may not receive the full value for the CD, if interest rates have risen. On the other hand, if rates have fallen, you may realize a higher-than-expected gain.
But if you hold to maturity, you’ll receive the contractually agreed on payments and full value. Those buying a brokered CD will want to look at the commissions in order to minimize costs.
5. Set up a cash management account at a robo-advisor
If you already have a robo-advisor account or are looking for a high-yield cash management account, then turning to a robo-advisor could be a great option. Two of the largest independent robo-advisors — Wealthfront and Betterment — have both been clamoring for new deposits and offer better-than-average yields.
As of March 2022, Wealthfront is offering 0.35 percent on cash balances, while Betterment is paying 0.1 percent. Those compare to the national average of 0.06 percent. Plus, with either robo-advisor you won’t pay an advisory fee on the cash and will get FDIC coverage on up to $1 million in cash deposits.
You can get an account set up quickly, and easily move money around to different accounts. Then if you’re ready to invest with the robo-advisor, you can move money to a fee-charging investment account and get started. A robo-advisor is an excellent choice for cash savings.
Make sure you choose the best brokerage for you
Each brokerage is different, and choosing the right brokerage for you is just as important as the decision to start investing, because fees and trading costs can potentially eat into your returns substantially.
Many online brokerages offer commission-free trading, but some brokerages can charge high fees. For example, a full-service brokerage can charge more than $100 a trade. Even if you are only investing biweekly or monthly, fees that high can still add up.
Some mutual funds can also have high expense ratios, which are fees for the ongoing management of the fund. But some brokerages today offer mutual funds with very low or even no-fee mutual funds.
Fees are not the only thing that matter when it comes to choosing a brokerage. For instance, you might care about research tools, an easy-to-use website or excellent customer support. No brokerage is perfect, but finding the one with the strongest mix of the things important to you will be the best choice overall.
When is it better to stick with a savings account?
Brokerage accounts and savings accounts serve different purposes, so which one you need depends on your goals. It’s not uncommon to have both types.
Brokerage accounts are usually for investing, while savings accounts are for building a nest egg — whether in the short or long term. For instance, you might use a savings account to store your emergency fund, which you might need to cover an expected expense or in the event of a job loss.
Savings accounts can also be used to save up for a specific goal, such as a down payment on a house or car. Or maybe you want to save for a vacation you’ve been wanting to take.
As you can see, savings accounts are best for setting aside a certain amount of money that will be there when you need it. These accounts are usually FDIC-insured, so when the time comes, the money will be there. Plus, high-yield savings accounts pay generous interest, allowing your money to grow passively over time.
If you’re looking to earn the return of a high-yield savings account with nearly the security of a bank, options exist to make it work with your brokerage account. Using a brokerage account to do your banking can also help you consolidate your financial life with one provider, and it may offer other benefits in terms of simplicity and convenience.