Don’t have a brokerage account? Here’s why you need it
As a rule of thumb, it’s a good idea to have enough money set aside as emergency funds to cover three to six months of bills. And a savings account is the safest place to keep that extra money.
But ideally, you’ll manage to accumulate savings beyond what you need in an emergency. When you do, you can put those funds to work for you. In fact, if you have extra cash that you don’t need for a rainy day and haven’t opened a brokerage account yet, you are missing out on a prime opportunity.
One Email a Day Could Save You Thousands
By submitting your email address, you consent to our sending you money advice as well as products and services which we believe may be of interest to you. You can unsubscribe anytime. Please read our privacy statement and terms and conditions.
Why do you need a brokerage account
The advantage of keeping money in a savings account is that your money is protected (assuming you don’t deposit more than $ 250,000, which is the FDIC’s insurance limit). But the downside is that your return on that account will be limited to the interest rate your bank pays.
Banks don’t pay a lot these days. And even when savings account rates are higher, banks may only pay 1% to 2% interest on your money.
On the other hand, if you open a brokerage account and invest in stocks, you could generate an annual return of around 10%. This is the average return generated by the S&P 500 Index over the past 30 years, and this index is generally considered representative of the stock market as a whole. But even if you don’t get a 10% return on your portfolio, you could do a lot better than with a savings account.
Let’s say you have $ 10,000 that you don’t need for emergencies. If you put that money into a savings account by paying 1% interest, then over the next 10 years you will increase that $ 10,000 to just over $ 11,000. But if you invest that $ 10,000 over 10 years and get an average annual return of 5%, which is pretty conservative for a brokerage account, you’ll end up with just over $ 16,000. And if you can get a 10% return, you’ll get around $ 26,000.
The Ascent’s Picks for Top Online Stock Brokers
How to choose a brokerage account
To invest your money, you have several options. You can open a regular, unrestricted brokerage account, or you can open an IRA (Individual Retirement Account). With an IRA, you will get some tax benefits, but you will also have to leave your money in the account until you are 59 1/2 years old or face penalties. A regular brokerage account will allow you to access your money whenever you want without penalties.
If you are planning to open a traditional brokerage account, pay attention to factors like fees, commissions, and account minimums. Some brokerage firms don’t charge you every time you trade. Others do. If you think you’re going to be trading a lot on your account, a brokerage that doesn’t charge a commission per trade might be your best bet.
During this time, some brokerage firms have a minimum account that you must maintain, in the same way that some bank accounts have a minimum balance. Research your options to see what is best for you.
Investing your money is a great way to turn it into a much larger sum over time. If you don’t already have a brokerage account, spend some time exploring your options so you can start growing your wealth and getting closer to your financial goals.