It’s great when people ask me finance questions. Many are embarrassed or afraid to ask financial questions, but that should not be the case. Remember, none of us have been taught about personal finance or investments. It’s just not something we learn in high school or college. There is no reason why you should know much about this stuff. It’s important but just not that exciting to learn on our own.
One question I’ve heard several times this month is, “What is a brokerage account?” That is a great question! A brokerage account is just like a savings account at your bank. The difference is money in a brokerage account can be used to buy stocks, bonds and mutual funds. Instead of earning a very small interest rate in a savings account, money in a brokerage account is invested and over the long-term has a much higher upside for making your money grow.
It’s easy to open a brokerage account. You can do this online at Schwab, Fidelity, E-Trade, TD Ameritrade or any similar type of brokerage company. The only requirement to open a brokerage account is a minimum amount of either $500 or $1,000 depending on the company. Once the account is open, you can buy stocks like Apple or Disney and thousands of different mutual funds.
The great thing about putting money in a brokerage account is that you can take out the money at any time. You may know that 401(k)s, IRAs, and Roth IRAs don’t allow money to be withdrawn unless you are 59 ½ years old. If you do, then there is a 10 percent penalty plus taxes. Brokerage accounts allow for more freedom to invest and then take the money out later for buying a home, car or starting a business.
Watch out for taxes though. Be sure to hold investments for at least a year in order to qualify for the 15 percent federal capital gains tax rate. If you sell an investment before 12 months, the gains on that investment are taxed at your ordinary income tax rate. This may be 15 percent for you, or it may be the higher 25, 28 or 33 percent tax rate. It just depends on how much money you make in your job. Keep things easy by holding stocks and mutual funds for at least a year.
If you have never invested in stocks before, try opening a brokerage account. Buy one or two shares of a company you know and use their products or services. This is the perfect way to learn about investing and it’s fun to watch a stock price grow (and scary to watch it go down). Follow your stock in the news to understand what makes the price go up and down. Over time, you will become a knowledgeable investor.
Steve Doster is a Certified Financial Planner™ professional providing commission-free financial advice for do-it-yourself investors. You can reach Steve at Doster Financial Planning by phone 619-688-1192 or email steve@dosterfinancialplanning.com. You can also follow Steve on Facebook, Linked In, Twitter, or blog to get more personal finance advice and tips.
