Don’t rush to close your brokerage account just yet.
- You may be earning a nice amount of interest on your savings right now.
- Investing your money could still make you a lot wealthier over time, as you could earn much higher returns over the long term.
For years on end, the amount of interest savings accounts were paying was so negligible that it wasn’t even worth talking about. But over the past number of months, savings account rates have soared on the heels of rate hikes on the part of the Federal Reserve. And now, it’s possible to snag an interest rate as high as 4% on your money, depending on the savings account you open (though many high-yield savings accounts are still paying in the 3% range).
Not surprisingly, certificate of deposit (CD) rates are also up these days. Many banks are paying upward of 4% for a 12-month CD term.
Given that both savings accounts and CDs allow you to earn interest on your money without running the risk of losing out on principal, you may be inclined to stick to these accounts for a while and stop investing in your brokerage account. But is that really the right call?
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It still pays to invest
It’s easy to see why the idea of putting all of your spare cash into savings or a CD might appeal to you. When you invest in a brokerage account, you risk losing money. You could buy $2,000 worth of stocks only to have that balance whittled down to $1,500 a month later if the market declines.
On the other hand, if you put $2,000 into a savings account, you’re guaranteed to have a $2,000 balance at a minimum as long as you don’t take withdrawals. And the same holds true with a CD — leave your money alone, and you won’t lose any.
But while it’s true that investing in a brokerage account carries some risk, the upside is also more substantial. Yes, some savings accounts and many CDs are paying interest in the 4% range right now. But if you invest your money, you might earn double or triple that return over time. And that could make a big difference.
Let’s say you have a spare $5,000 you don’t expect to need or use for many years. If you put it into a savings account and leave it there for the next 20 years, and your bank pays you 4% interest on that sum, you’ll end up with $10,956. That means you’ll have doubled your money, which isn’t too shabby.
But let’s say you’re able to snag an 8% return on your $5,000 over the next 20 years by investing it. In that case, you’ll end up with $23,305. That’s almost five times the amount you’re starting with.
Don’t just take the easy way out
Keeping all of your money in a savings account or CD may be less stressful than investing it. But you might also limit yourself if you insist on keeping your cash in the bank. So even though you’ll get a lot more interest out of a savings account or CD than you would’ve a year ago, it still makes sense to put some of your money into a brokerage account and continue investing.
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