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Investing in the stock market can help your finances — but only under the right conditions. Find out when money is best kept elsewhere. [[{“value”:”
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Putting money into a brokerage account allows you to invest it. Investing is a good thing, as you can grow your wealth much more quickly by taking advantage of compound growth. This happens when returns are reinvested and earn more returns.
But there are some situations when money does not belong in a brokerage account, despite the fact investing in one ordinarily has benefits. In fact, here are a few key signs that your money is going into a brokerage account when it really shouldn’t be.
1. You can’t afford to lose the money
The biggest red flag that suggests money should not be going into your brokerage account is if you absolutely cannot afford to lose it.
The reality is, almost all investing carries some risk. If you have funds that are absolutely critical — such as money for a down payment on a home you’re buying next month — it cannot be in the stock market. It needs to be safe in an FDIC-insured bank account, where there is no risk of losing it and not getting the house you were planning to buy.
Before you invest, think about what would happen if you did suffer a loss. Would you be able to recover over a reasonable period of time, or would the consequences of poorly performing investments be devastating to your overall personal finances? If it’s the former, then you can put the money into a brokerage account. If it’s the latter, you shouldn’t.
2. You may need the money within the next two years or so
One of the best ways to reduce the risks associated with investing is to keep your money invested for the long term. There are a few reasons for that.
For one thing, if you are investing over a long time horizon, you don’t need to worry about trying to time your purchase of stocks to the perfect moment. You can let time do its work to help your money grow, rather than hoping you can buy stock shares when the price temporarily falls and get lucky enough to sell it at a profit soon after.
Since most people aren’t great at predicting exactly when a company’s share price will change, for better or for worse, it’s best to invest only if you’ll be keeping your money in the market for at least a couple of years (often, five or more years is a good number). Even a great investment can suffer temporary losses because of external forces, such as a recession.
A quick look at this chart showing the performance of the S&P 500 demonstrates just how important long-term investing is. The S&P 500 is a financial index aimed at tracking the performance of 500 of the largest U.S. companies. It has a consistent track record of producing average 10% annual returns, but doesn’t come close to doing that every year.
If you keep your money invested for at least five years, chances are good you’ll turn a profit eventually if you’ve picked the right investment in a solid company or a financial index with a proven record. But you can’t take a chance on investing money you’ll need in the coming year or two, only to get stuck having to sell at a huge loss because you had bad timing.
3. You haven’t maxed out your employer match yet
Finally, your money doesn’t belong in a brokerage account if you haven’t invested enough in a company retirement plan to get your employer match. This is a matching contribution many employers make to their workers’ 401(k) contributions. You have to invest a certain amount of your own money in order to get the full match, though.
For example, if your employer offers you a 100% match on up to 3% of your income and you make $50,000, your company would deposit up to $1,500 in your retirement account — but only if you put that much in, too.
You don’t want to pass up free money, so if you aren’t investing the amount needed at work to get your full match, you should do that before investing in a brokerage account. Contact HR or your plan administrator right away to increase your contributions before passing up any more free cash.
If you spot any of these red flags, you should switch to putting money into your 401(k) or savings account ASAP, instead of into a brokerage account. Once you’ve got money you can afford to lose, have a long enough investment timeline, and have already earned all the 401(k) matching funds you can get from your employer, then you can start using your brokerage account again.
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