Don’t Have a Brokerage Account? Here’s Why You Need One

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.

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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.

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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.

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.

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