Here's How to Decide How Much to Put Into Your Brokerage Account

Putting money into a brokerage account allows you to invest it for your future. You can open a retirement account or a taxable account with a brokerage firm to save for other long-term goals -- or you can open both.

But how much money, exactly, should you be putting into your brokerage account? Here's how you can decide.

Consider your overall financial situation

You should start investing money as soon as possible. The sooner you begin funneling money into a brokerage account, the easier it will be to build wealth thanks to compound growth.

In fact, if you start investing at 30 and want to be a millionaire by 60, you have to contribute about $507 a month assuming a 10% average annual return before inflation. But if you wait a decade, you'd have to invest much more each month -- $1,454.96 to hit millionaire status. That's almost three times what you'd have needed to save with an earlier start.

Where to put your money first

That being said, you aren't ready to invest anything in a brokerage account if you don't have some other financial goals checked off your list first. For one thing, you must make sure you have paid off high interest credit card debt. The Federal Reserve reported that the average interest rate on consumer credit cards was 20.09% as of April 2023. You won't earn that kind of return with a safe investment, so pay off your credit cards before putting money into your brokerage account.

You'll also want to be sure that you have a fully-funded emergency fund in a savings account, which means having about three to six months of living expenses saved. You should have emergency money because if you tie up all your assets in investments with a brokerage firm, you could find yourself either going into debt or forced to sell investments at a bad time at a loss if you have an emergency.

If your employer is offering a 401(k) matching contribution, you should make sure you're also investing enough in your workplace plan to earn the full match. Otherwise, you're passing up free cash. Do this before putting money into your brokerage account to take advantage of the guaranteed returns.

If you don't have high interest consumer debt, you do have an emergency fund, and you're maxing out your 401(k), then you have to take some additional steps to decide exactly how much to put into your brokerage account.

Think about your financial goals

Determining how much money to put into a brokerage account largely depends on how much income you have available and what short-term and long-term goals you have.

A good rule of thumb to follow is not to put any money in your brokerage account that you'll need within the next two to five years. That's because the stock market predictably has both boom and bust times. If you have a long investing timeline, you can afford to lose some money, wait it out, and eventually earn it back (and hopefully more). But if you're going to need the money in the next couple years, it's possible the timing will work out poorly for you and you'll have to sell during a downturn before you have a chance to make any profit on your investments.

If you're saving for long-term goals beyond that two-to-five-year time limit, a brokerage account can be a great place to put the money because you can earn better returns by investing than in a savings account. You can determine exactly how much to invest in your account to meet your goals by using the Savings Goal calculator at Investor.gov. You just need to specify what amount you're starting with, your timeline, your projected returns, and what your goal is.

For example, if you want to have $20,000 in 10 years time and you're starting with $2,000, you could use this calculator to find out you'd need to put $77.45 per month in your brokerage account to hit that goal. If you do this with all your financial goals, you can get an exact estimate of the minimum you need to accomplish your goals -- and you can aim to put at least that much money into your brokerage account.

Put a little time into customizing your investing plan

Taking this approach and calculating how much you need for your goals is more accurate than just following a simple rule of thumb, like investing 15% of your income in your brokerage account -- although it takes more effort. If you know what your goals are, it's worth going through this exercise to make sure you're investing enough to accomplish them.

Of course, if you have extra disposable income after covering your needs and setting aside some for other financial goals and you know you won't have to use that money for short-term purchases, you can also opt to put every extra penny into a brokerage account. After all, the more you invest, the faster you can grow your wealth, so there's no reason not to invest your extra cash.