As a general rule, it’s smart to have enough money tucked away as an emergency fund to cover three to six months of bills. And a savings account is the safest place to keep that extra cash.
But ideally, you’ll manage to accumulate savings beyond what you need for emergencies. When you do, you can put those funds to work for you. In fact, if you’re sitting on extra money you don’t need for a rainy day and you haven’t yet opened a brokerage account, you’re missing out on a prime opportunity.
One email a day could help you save thousands
Tips and tricks from the experts delivered straight to your inbox that could help you save thousands of dollars. Sign up now for free access to our Personal Finance Boot Camp.
By submitting your email address, you consent to us sending you money tips along with products and services that we think might interest you. You can unsubscribe at any time.
Please read our Privacy Statement and Terms & Conditions.
Why you need a brokerage account
The upside of keeping money in a savings account is that your cash is protected (assuming you don’t deposit more than $250,000, which is the FDIC insurance limit). But the downside is that your return in that account will be limited to whatever interest rate your bank happens to be paying.
These days, banks aren’t paying a lot. 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 might generate an annual return in the ballpark of 10%. That’s consistent with the average return the S&P 500 index has generated over the past 30 years, and that index is generally considered representative of the stock market on a whole. But even if you don’t score a 10% return in your portfolio, you might do a lot better than you would with a savings account.
Say you have $10,000 you don’t need for emergencies. If you put that money into a savings account paying 1% interest, then over the next 10 years, you’ll grow that $10,000 into just over $11,000. But if you invest that $10,000 over 10 years and score an average yearly 5% return, which is pretty conservative for a brokerage account, you’ll end up with a little more than $16,000. And if you manage a 10% return, you’ll be looking at around $26,000.
The Ascent’s picks for the best online stock brokers
Find the best stock broker for you among these top picks. Whether you’re looking for a special sign-up offer, outstanding customer support, $0 commissions, intuitive mobile apps, or more, you’ll find a stock broker to fit your trading needs.
See the picks
How to choose a brokerage account
When it comes to investing your money, you have several options. You could open a regular, unrestricted brokerage account, or you could open an IRA (individual retirement account). With an IRA, you’ll reap certain tax benefits, but you’ll also need to leave your money in the account until the age of 59 1/2 or otherwise face penalties. A regular brokerage account will let you access your money whenever you want without penalties.
If you’re going to open a traditional brokerage account, pay attention to factors like fees, commissions, and account minimums. Some brokerages don’t charge you every time you make a trade. Others do. If you think you’ll be trading a lot in your account, a brokerage that doesn’t charge a per-trade commission could be your best bet.
Meanwhile, some brokerages have an account minimum you need to maintain, similar to how some bank accounts have a minimum balance. Research your options to see what’s best for you.
Investing your money is a great way to turn it into a much larger sum over time. If you don’t have a brokerage account yet, spend a little time exploring your choices so you can start growing wealth and getting closer to meeting your financial goals.
View more information: https://www.fool.com/the-ascent/buying-stocks/articles/dont-have-a-brokerage-account-heres-why-you-need-one/