He recommends a simple approach you can use to invest while saving on big expenses.
- Investor and author Brian Feroldi recommends putting a third of your extra money into your brokerage account.
- It also has a comprehensive personal finance framework with important steps to follow before investing in stocks.
Investing in the stock market is the most proven way to build wealth, and you get the best results when you do it regularly. If you make regular deposits into your brokerage account, you can keep investing more, which makes a big difference over time.
But how much money should you put in your brokerage account each month? Financial expert Brian Feroldi is known for simplifying investing in the stock market, and he recently answered this common question.
How much to put in your brokerage account
To build wealth, Feroldi’s recommended approach is to divide any extra money you have into three equal buckets. You then distribute this money as follows:
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- A third party on your brokerage account
- A third party to a mortgage repayment fund
- A third party to an irregular expense fund (a car, vacation, etc.)
For example, if you have $750 extra per month, you would put $250 in your brokerage account, $250 for your mortgage, and $250 to save for irregular expenses.
Feroldi says to mix and match them however you see fit. You can do a different split, like 40-30-30, if you want to invest more money in stocks. Although he suggests using equal thirds, part of personal finance is figuring out what’s best for you.
You may have noticed that this recommendation is for your extra money. That’s because he’s actually following several other steps as part of Feroldi’s personal finance. Wealth creation is important, but there are other prerequisites to consider first.
What to do first
A brokerage account is a good place to put money when you no longer have pressing financial needs. But it shouldn’t be the first thing on your priority list. For example, if you don’t have an emergency fund or are in expensive debt, both are better places to start than investing in stocks.
Here’s what you should do with your money before putting anything in a brokerage account:
- Build an emergency fund. Start by saving a month’s worth of living expenses. After that, you can aim for an emergency fund of three to six months or more, depending on how much emergency savings you need.
- Eliminate high interest debt. Spend every dollar on high-interest debt, like credit card debt, until it’s used up. If possible, refinance this debt to get a lower interest rate.
- Contribute to retirement accounts. These offer tax advantages over a brokerage account, so invest with them first. If your employer offers a 401(k) with matching, contribute at least enough to get the full match. It’s also a good idea to invest in an Individual Retirement Account (IRA) or a Roth IRA.
Two other things Feroldi recommends, if any, are maxing out a health savings account (HSA) and funding your kids’ college education. You may also want to pay off all of your non-mortgage debt, although when you do will partly depend on the interest rate.
To recap, Brian Feroldi recommends putting about a third of your extra money in a brokerage account, where you can use it to invest in stocks. However, it is with your extra money, after taking care of all of the following:
- Full funding for your emergency savings
- Eliminate non-mortgage debt
- Maximizing ERI Contributions
- Get your full employer match on a 401(k) or maximize your 401(k)
- Maximize your health savings account (if applicable)
- Contribute to college funds for your children (if applicable)
Completing these steps will put you in a great financial position. After that, investing through a brokerage account will allow you to grow your wealth faster. Also, make sure you use one of the best stockbrokers so you have the features you need and don’t pay unnecessary fees.
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