by Maurie Backman | May 29, 2021
The Ascent is reader-supported: we may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page.
A brokerage account could help you grow wealth -- but it's the wrong place for your emergency savings.
If you have your emergency fund in a savings account right now, you may not be happy with the amount of interest you're getting on that money. In fact, you may be tempted to move that pile of cash out of a savings account and into a brokerage account, where you can invest it and possibly generate much higher returns. But here's why that's not recommended.
Get free access to the select products we use to help us conquer our money goals. These fully-vetted picks could be the solution to help increase your credit score, to invest more profitably, to build an emergency fund, and much more.
By submitting your email address, you consent to us sending you money tips along with products and services that we think might interest you. You can unsubscribe at any time. Please read our Privacy Statement and Terms & Conditions.
If you put $10,000 into a savings account, your account balance can't drop below $10,000 unless you take a withdrawal from it. Rather, your balance can only stay the same or go up once your modest interest payments hit. On the other hand, when you invest in a brokerage account, your principal amount isn't protected. So the $10,000 you put in one day could be worth just $8,000 a few months later if your investments' value declines. That means if you need money in a pinch, you may not have access to the amount you think you have available.
There's a reason so many people make great money investing in stocks -- they have the potential to deliver very high returns. But in exchange for those solid returns, you take on a fair amount of risk -- and that's not something you can afford to do with your emergency fund. Rather, you need to make sure that money is there for you when you need it.
The purpose of having an emergency fund is to avoid debt when an unplanned expense arises, or if you become unemployed and need cash to pay your bills. But if you keep your emergency savings in a brokerage account, and your investments happen to be down when you need that money, you may not want to take a withdrawal. If you do, you'll lock in a loss rather than give yourself the option to ride things out and wait for your investments to regain value. And if you can't tap your emergency cash to cover your surprise bill, you may have to take on debt if that expense can't wait.
Investing money is a solid way to grow wealth on a long-term basis. But you shouldn't invest any money that's earmarked for emergencies. Rather, have an emergency fund with enough cash to cover three to six months of expenses that's stashed away in a savings account. Any money you save beyond that point can be invested, with the understanding that the stocks you buy may gain or lose value throughout the years.
Find the best stock broker for you among these top picks. Whether you're looking for a special sign-up offer, outstanding customer support, $0 commissions, intuitive mobile apps, or more, you'll find a stock broker to fit your trading needs.
In fact, investing your money is a smart move when it comes to your retirement savings, but for your emergency savings, the bank is the best bet. If you're unhappy with the interest you're getting on your emergency fund right now, you may want to shop around for a different bank and see if there's a better rate out there.
Over the long term, there's been no better way to grow your wealth than investing in the stock market. But using the wrong broker could make a big dent in your investing returns. Our experts have ranked and reviewed the top online stock brokers - simply click here to see the results and learn how to take advantage of the free trades and cash bonuses that our top-rated brokers are offering.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2021 The Ascent. All rights reserved.