Where your savings account money can go

A savings account holds money safely and earns a small amount of interest, but that interest rate is usually between 0.01% and 5.35% depending on the bank and current market conditions. If you have money sitting in savings that you won't need for emergencies or near-term expenses, you can move some of it into investments that historically return more over longer time periods. The tradeoff is that investments can lose value in the short term, while a savings account balance never shrinks.

Common places to move savings into include stock market index funds (which track groups of company stocks), bonds (which are loans you make to governments or companies), certificates of deposit or CDs (which lock your money away for a set time in exchange for higher interest), and individual stocks (which means owning pieces of specific companies). Each has different risk levels, different minimum amounts, and different rules about when you can access your money.

Before moving any money, decide how long you can afford to leave it invested without touching it. Money you might need within the next three to five years usually stays in savings. Money you won't touch for ten years or more can handle the ups and downs of stock investments.

Key Takeaways

  • Savings accounts earn less interest than most investments, but your balance never shrinks and you can withdraw money anytime.
  • Stocks, bonds, and index funds historically return more over long periods, but can lose value in the short term.
  • You need a brokerage account (opened at a bank, investment firm, or online broker) to buy stocks, funds, or bonds—your savings account cannot hold these directly.
  • Starting with low-cost index funds in a tax-advantaged account like an IRA often makes sense for people new to investing.
  • Money you might need within three to five years should usually stay in savings, not move into investments.

Opening a brokerage account to hold investments

Your savings account at a bank cannot hold stocks or mutual funds. You need a separate account called a brokerage account, opened at a company that buys and sells investments on your behalf. Major brokerages include Fidelity, Charles Schwab, Vanguard, E-Trade, and Interactive Brokers, but hundreds of others exist. Many traditional banks also offer brokerage services through a separate division.

Opening a brokerage account takes 10 to 20 minutes online. You provide your name, address, Social Security number, employment information, and banking details. The brokerage runs a background check and verifies your identity. Once approved (usually within one business day), you can link your savings account and transfer money into the brokerage account, then use that money to buy investments.

Most brokerages charge no fee to open an account or hold money in it. They make money when you buy or sell investments—some charge a flat fee per trade (often $5 to $10), while others charge nothing per trade but make money through other means. Read the fee schedule before opening, because fees compound over decades.

Tax-advantaged accounts versus regular brokerage accounts

A regular brokerage account has no restrictions. You can deposit any amount, withdraw anytime, and buy or sell anything the brokerage offers. You pay taxes on any gains when you sell, and on dividends each year. This account makes sense if you have already maxed out retirement accounts or need access to the money within a few years.

A traditional IRA (Individual Retirement Account) lets you deposit up to $7,000 per year (as of 2024; this amount changes yearly). Money grows without annual taxes, and you do not pay taxes until you withdraw after age 59½. You cannot touch the money before then without penalties, except in rare situations. This account makes sense if you want to reduce your taxes now and can leave money untouched for decades.

A Roth IRA also takes $7,000 per year, but you pay taxes on the money going in. It grows tax-free, and you withdraw tax-free after age 59½. You can withdraw your original deposits anytime without penalty, but not the growth. This account makes sense if you expect to be in a higher tax bracket later, or if you want tax-free growth.

A 401(k) is offered through your employer. You contribute money before taxes are taken out, it grows without annual taxes, and you pay taxes when you withdraw after age 59½. Many employers match a portion of what you contribute—assistance programs. If your employer offers a match, fund the 401(k) first before opening an IRA.

Moving money from savings into a brokerage account

Once your brokerage account is open and approved, link it to your savings account. Most brokerages let you do this online by entering your savings account number and routing number. The brokerage then sends two small test deposits (usually under $1 each) to your savings account. You log into your savings account, find those deposits, and confirm the amounts back to the brokerage. This proves you own the savings account.

After verification (usually one to three business days), you can transfer money from savings to the brokerage account. Most transfers take one to three business days. Start with an amount you are comfortable with—you do not have to move all your savings at once. Many people move money gradually over months or years.

Once the money lands in your brokerage account, it sits as cash until you buy an investment. You can leave it there, or use it to purchase stocks, funds, bonds, or other investments the brokerage offers. The money is still yours; the brokerage is just holding it and executing your trades.

Choosing what to invest in

If you are new to investing, low-cost index funds are a common starting point. An index fund tracks a large group of stocks (like all 500 companies in the S&P 500) by buying a tiny piece of each. You own all of them with one purchase. The fund charges a small annual fee (often 0.03% to 0.20% of your money per year) to cover costs. Because you own hundreds of companies, if one fails, it barely affects you.

A target-date fund automatically shifts your money from stocks to bonds as you approach retirement. If you plan to retire in 2050, you buy a "2050 target-date fund," and it handles the shifting for you. This removes the need to rebalance yourself.

Individual stocks mean buying shares of one company. This requires more research and carries more risk—if the company struggles, your money can drop significantly. Most financial advisors suggest keeping individual stocks to a small portion of your total investments if you are new to this.

Bonds are loans you make to governments or companies. They are less risky than stocks but return less. A bond fund holds many bonds, spreading the risk. Bonds make sense as part of a balanced portfolio, especially as you get closer to needing the money.

Understanding risk and time horizon

Investments go up and down. The stock market has lost 20% or more in value several times over the past 50 years, but it has always recovered and reached new highs within a few years. If you need the money in two years, a major drop could force you to sell at a loss. If you can wait ten years, the odds of coming out ahead are much higher.

Your time horizon is how long you can leave money invested. A longer time horizon means you can handle more stock exposure. A shorter time horizon means you should hold more bonds or keep money in savings. A common rule is: if you need the money within five years, keep it in savings or short-term bonds. If you will not touch it for ten years or more, you can hold mostly stocks.

Diversification means spreading money across different types of investments so one bad performer does not wreck your whole portfolio. A single index fund already diversifies you across hundreds of companies. Adding bonds, real estate funds, or international stocks diversifies further. Most people do not need more than three to five different investments.

Taxes and ongoing management

In a regular brokerage account, you owe taxes on investment gains when you sell, and on dividends each year. In a traditional IRA or 401(k), taxes are delayed until you withdraw. In a Roth IRA, you owe no taxes on gains or withdrawals. This is why tax-advantaged accounts are often better for long-term investing—you keep more of your gains.

Once you buy an investment, you do not have to do anything. The fund or stock sits there and grows (or shrinks). Many people check their balance once or twice a year rather than daily. Checking too often can tempt you to sell during downturns, which locks in losses. A common strategy is to set money aside, invest it, and leave it alone for years.

Rebalancing means adjusting your mix of stocks and bonds back to your target if one has grown much larger than the other. If you started with 80% stocks and 20% bonds, and stocks grew to 85%, you might sell some stocks and buy bonds to get back to 80%. Most people rebalance once a year or every few years.

Frequently Asked Questions

Can I move money back from investments to my savings account?

Yes. You can sell any investment and the money returns to your brokerage account as cash, usually within one to three business days. You can then transfer it back to your savings account. In a regular brokerage account, you can do this anytime. In a traditional or Roth IRA, early withdrawals before age 59½ may trigger taxes and penalties, though Roth IRAs let you withdraw your original deposits penalty-free.

What is the minimum amount I need to start investing?

Most brokerages have no minimum to open an account. Many index funds and ETFs (exchange-traded funds) can be bought for $1 to $100 per share. Some brokerages let you buy fractional shares, so you can invest $50 or $100 in a fund that costs $300 per share. Start with whatever amount feels comfortable.

Should I move all my savings into investments?

No. Financial advisors typically recommend keeping three to six months of living expenses in a savings account for emergencies. Only move money you will not need for several years into investments. If you lose your job or face an unexpected expense, you want cash available without having to sell investments at a bad time.

Do I need a financial advisor to invest?

No. Many people successfully invest on their own using low-cost index funds. If you want professional guidance, financial advisors charge either a flat fee, an hourly rate, or a percentage of your assets (typically 0.5% to 1% per year). Robo-advisors (automated services) charge lower fees and build a portfolio based on your answers to a questionnaire.

What happens to my investments if the brokerage goes out of business?

Your investments are protected. Brokerages are required to hold customer investments separately from their own money. If a brokerage fails, the Securities Investor Protection Corporation (SIPC) covers up to $500,000 per account. Your stocks and funds belong to you, not the brokerage.