One of my favorite recent financial revolutions is the rise of Robinhood. This is the first mainstream DIY brokerage account that allowed the public to trade stocks and other securities, commission free. They were so successful that traditional brokerages like TD Ameritrade were forced to also allow commission free trades on their own platforms, just to stay competitive. We invest in stocks and bonds because we believe those companies and municipalities will eventually use our investments to create value. Value in the sense of stock appreciation or dividend payouts. The concept is no different than opening a savings account. With a savings account, you’re giving your bank money so they can loan it to others and create value. The secret is when the banks loan out your money, they’re collecting an interest rate much higher than the measly 0.09% they offer you. Interest rates sometimes in the double digits… while you’re lucky if they cut you 2%! That’s why DIY brokerages are my personal favorite investment alternative. You have thousands upon thousands of options like mutual funds, ETFs (electronically traded funds), ETNs (electronically traded notes), stocks, bonds, etc. No more questioning which bank is going to give you the best interest rate on your savings account because truthfully, they’re all competing on marginal 1/10th of percentages anyways.
But wait, aren’t brokerages riskier? Plus, who has time to manage it and research which securities are right for me? The answer to those questions is, it certainly can be riskier and more time intensive. But it also doesn’t have to be, it’s up to you. That’s the beauty and flexibility of brokerages. Online brokerages like TD Ameritrade are FDIC insured, just like your bank. The stock market also has a bunch of investment vehicles that are built specifically to be low risk and stable over time. Yet, earning a return that’s much better than a savings account. It’s liquid, just like your savings account so you can pull money out if you need it. Opening an online brokerage account is so easy, it takes the same amount of time to open a savings account.
For those of you who might feel intimidated by the process, these brokerages also offer you online help, phone support, and can even refer you to financial planners if you don’t feel like you have the time or education to research the right investments for your situation (for a fee of course). Financial planners are experts at understanding your risk appetite and pairing that with the right investments to help yield you the highest returns possible.
Chances are you probably have a 401K, IRA, or some sort of retirement account. If you’re still questioning the validity of a brokerage account… guess what? You’re already participating in something very similar through your 401K! Your 401K is investing your money into mutual funds, stocks, bonds, etc to appreciate your assets for the future. Simplistically, it’s the exact same reason you opened a savings account. You might enjoy keeping a savings account and depending on your situation, it could very well make a lot of sense. Maybe you want to have some emergency funds on hand that are more liquid than a brokerage account. Maybe, you have a unicorn savings account that is returning you something higher than the national US inflation rate. At the end of the day, everybody’s financial situation is different. It’s up to you to decide where you want to allocate your assets.
But don’t forget that there are other options for you to grow your money. Brad and I speculated what college tuition would look like by the time his child reached 18. It was scary. If your savings account isn’t at the very least beating inflation rates, it’s probably time to ask yourself. “Is it worth it?”