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Justin from Money is the Root asks whether, because inflation erodes the buying power of money in a savings account, it makes sense to use a brokerage/stock account as a savings vehicle—and if so, what share of total savings should be in brokerage versus a traditional savings account.
Years ago opening a bank account was simple. You picked a local bank, maybe accepted a small gift, and used checks and in-person deposits to manage money. Today the choice is more complicated: there are many banks and financial firms, online options, and a variety of account types, while interest rates on savings are generally very low. That low return makes many people less motivated to shop around, since rates tend to be poor almost everywhere.
Common places to hold checking and savings include:
– Traditional banks
– Online banks
– Credit unions
– Full-service brokerages
– Discount brokerages
Each institution offers various account types—money market funds, high-yield accounts, low-minimum accounts, CDs, and more—each with different fees and rates. Where your account is held matters less than the specific account features, especially fees and interest.
Important free services to look for:
– No monthly fee
– No ATM fees or reasonable ATM fee refunds
– Free online bill pay
Decide what you need from a bank. Many people use a checking account for direct deposit and bill pay and keep an attached savings account for an emergency cushion. Accounts can be linked to investment accounts for easy transfers.
How much to keep in cash versus a brokerage?
You need a sizable cash cushion for job loss, home or car repairs, and medical emergencies. The exact amount is personal. A safe rule is at least six months of living expenses; I prefer about a year because it feels more secure. If your job is unstable or you’re a single-income household, keep more.
Where that cash sits—traditional bank, online bank, or brokerage-linked account—matters less than liquidity and the interest rate. Focus on getting the best safe return you can without risking access to the funds when you need them.
About inflation and real returns
“Real return” equals your interest rate minus inflation. If inflation is 3% and your account yields 4%, your real return is about 1%. If inflation is 3% and your savings rate is 2%, you lose about 1% of purchasing power. Inflation has been low recently, but it could rise, and interest rates may follow.
Can a brokerage account replace savings?
You can hold cash-like accounts at brokerages, and that can be convenient if you invest a lot, but you can also link a bank account to your brokerage. The key point: don’t sacrifice liquidity by moving necessary emergency cash into the stock market. Market investments can offer higher returns but are not reliable short-term stores of value.
Other safe alternatives to a regular savings account
– I bonds: interest adjusts with inflation. Purchased at treasurydirect.gov. They must be held at least one year; cashing within five years incurs a small penalty.
– Floating rate notes: yield rises with market rates; available via treasurydirect.gov. Note holding restrictions apply.
– Certificates of deposit (CDs): often pay more than savings accounts but tie up funds until maturity and may charge penalties for early withdrawal.
Bottom line: don’t worry too much about whether your savings live in a traditional bank or a brokerage—choose what’s most convenient and offers the best safe return. Prioritize liquidity and safety for emergency funds, and consider I bonds, FRNs, or CDs if you want a bit more yield without taking market risk.
