Back in 2017, at the age of 25, I discovered a simple acronym that would change my life forever.
The FIRE (financial independence retire early) movement laid out the exact blueprint needed for financial independence. And showed me the actual math behind how to achieve it.
After learning about the progress I could make using the strategies of the FIRE movement I was sold.
I started looking at all the options I could use to best prepare for an epic retirement.
What Is A Brokerage Account?
A brokerage account is essentially an investment vehicle you can use to buy goodies such as stocks, bonds, ETFs and mutual funds.
It allows you more flexibility and control over your investments and can be an excellent option for wealth building.
Do I Need A Brokerage Account?
Many people wonder “What is the point of a brokerage account?”. Well, a brokerage account is a great option for those looking to diversify their retirement options.
Yes, there is the traditional 401Ks (or 403Bs if you work at a non-profit) for those with a W-2 employer. There is also the option of opening a Roth IRA account or a Traditional IRA account.
These are all great options to save for retirement. If you are lucky enough to have an employer who provides a 401k and matches it, take advantage of it!
It is essentially free money to your account and who does not like free?
However, if you don’t have retirement options at your job, then a brokerage account could be a great choice for you. It is also a great option for those who have already maxed out their workplace retirement options and IRA.
Let’s say you have already contribute the max to your 401k ($19,500) and an IRA account ($6,000). However, you still have money you want to invest! This is when most people would consider opening a brokerage account.
What makes a brokerage account stand out from the other traditional retirement accounts is that you have more control over it.
Brokerage Account = More Control + More Options
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Why A Brokerage Account is A Great Option
- You can sell your investments at any time
- There is no limit on how much money you can put into your account
- Free to open – some firms even give you money for opening the account
Furthermore, a brokerage account allows you to set aside additional money in a range of options that may not be available at your workplace.
How To Open A Brokerage Account
Opening a brokerage account is very easy to do. In fact, you can do it online in as little as 15 minutes.
The online instructions are usually very easy to follow. However, if you need additional help, just call the brokerage provider you chose. It is their job to make sure everything goes smoothly and they will walk you through set up and your first investment.
Types Of Account Providers
When opening your account, you might be asked if you want to join a cash or margin account.
Cash accounts are funded with your own money. This means you deposit money into your account (via a bank account) BEFORE you are able to buy securities.
Margin accounts are funded through borrowing money. They essentially allow you to borrow money against the value of securities in your account. Think The Big Short.
It is usually best to stick with a cash account because then you are trading with money you actually own.
You’ve Got Options With A Brokerage Account
A tried and true choice for your account is Vanguard or Fidelity. They are both reputable firms that offer a multitude of low cost options – mutual funds, ETFs, etc.
There is also the option of joining a roboadvisor such as Betterment or a managed option like Ellevest.
If you choose to go with the managed option, make sure that your fees are reasonable. This usually means aiming for a managed adviser that charges less than 1% in fees.
Also, if you are working with any financial planner make sure you ask this very important question.
Question To ALWAYS Ask: Are you a fiduciary?
When an advisor has a fiduciary duty, they are forced BY LAW to act in the best interest of their client.
You always want the answer to this question to be a yes. Get it in writing.
If the person says no or answers with more questions. Run. They are not serving you. This means they can offer you investment options based on what pays them the most.
Who wants that? No one.
A fiduciary is a person or organization that acts on behalf of another person or persons to manage assets.
Investopedia.com
The balance has a great article that breaks down all the terminology around investing. If you need some additional help with the lingo, check out an informative breakdown here.
Final Thoughts
Opening a brokerage account, simply gives you more options. You can use this money for retirement, a wedding or anything you choose.
With a traditional retirement account, there are penalties for withdrawing your money before retirement age. A brokerage, however, does not have those cons.
Do you have a brokerage account? If so, who is your provider and why? Like 99.999% of the FIRE people, I chose to open my account with Vanguard.
It has been super hassle free and their app makes transferring money very convenient.