How to Use Brokerage Accounts

How to Use Brokerage Accounts
How to Use Brokerage Accounts

Introduction of How to Use Brokerage Accounts

How to Use Brokerage Accounts. okay, so brokerage accounts let’s talk about them because I feel like a lot of us get confused by the term brokerage what the hell does that mean in this article we are going to talk about what are the pros and cons and how I personally use brokerage accounts to fuel my financial goals so before we get into the article I want to put a disclaimer out there that I am not a financial advisor if you want to seek the advice of a financial advisor you can absolutely do so before you make any big investment decisions and do your own research.

And I hope this article is educational for you so let’s hop into it hey guys it’s Justine with debt-free millennials the help you crush your debt and live payment free part of my debt-free living is definitely building up cash reserves for different financial goals that I have so for you that could be a down payment on a house that’s what I’m personally saving up for it could be a car purchase maybe you want to buy a sailboat whatever it may be you want to start saving money and investing that money and maybe you’re looking at a brokerage account so.

I actually got this question from brit on Instagram she says I would love to hear more about brokerage accounts what to use them for and the fees involved and then I also had a similar question from Joan Johan and they said what are the positives to a brokerage taxable account so first let’s get into what exactly a brokerage account is so a brokerage account is a type of investing account in which you can save for short midterm or long term goals and you don’t necessarily have to use the money for retirement as I mentioned before if you have a goal to save for a down payment or a car or maybe building up funds for a wedding or expenses for a future kid you can absolutely use a brokerage account to build up.

investing in different assets such as bonds stocks

That savings now in a brokerage account you will be investing in different assets such as bonds stocks or mutual funds or index funds and you’re going to be using after-tax dollars to fuel that brokerage account now the biggest pro to a brokerage account is that you can use the money for any goal that you want and you can withdraw that money at any time you also don’t have to wait until retirement to use this money so you can invest in a few years and then after a few years you can take the money out and do with it.

What you want now the biggest con to the brokerage account is that any money that you earn or gain inside of this brokerage account will be taxed and that tax is broken down into two different categories that include short-term capital gains tax or long-term capital gains tax so this tax occurs if you were to sell any of your investments inside of that brokerage account for again meaning you are selling it for more than what you initially purchased and invested it in then that difference is going to be taxed short-term capital gains tax goes into effect if you sell one of those capital assets the stocks the bonds the mutual funds the index funds or ETF.

you’re subject to short-term capital gains

If you sell any of those in one year or less then you’re subject to short-term capital gains if it’s more than a year then you’re subject to long-term capital gains tax now again I’m not a financial advisor but I did find a really great article on Investopedia that breaks down long-term and short-term capital gains and they actually have a really nice chart to show you how you are taxed and what tax rate you would fall under based upon your filing status and then how much you earn an income for that year so there’s going to be a difference between long-term capital gains and you can see.

If you were single and I’m guessing most of you are going to fall within the 15 tax rate if you make between this thirty-nine thousand three seventy-six up to four hundred and thirty-four thousand dollars then you’re going to be subject to that fifteen percent tax rate if you sell off those investments after a year that’s considered long term now if it’s short term then you’re going to go down into the short term capital gains tax bracket and figure that out and you can see there’s a big difference it’s important to note in this is that you are only taxed on the gains inside of your brokerage account, not on the initial money that you put in to purchase your initial investments so the money.

That you’re using from your checking account or whatever goes into your brokerage account that is not taxed extra in addition the only thing that is taxed is the gains that you would earn on that on that investment okay so we also want to know what kind of fees are involved with a brokerage account and this really depends on who you end up opening the brokerage account firm with now if you guys remember last year I did a whole 1 000 experiment with betterment actually did open up a general investing brokerage account with betterment and they do have an annual fee of 0.25 and.

down payment nest egg so inside of vanguard each index fund

So that would be a fee on top of whatever the expense ratios are for the stocks or mutual funds or index funds that I purchased inside of betterment but I also have a very large brokerage account with vanguard now I use my brokerage account to invest in primarily bond index funds and then I also have stock index funds and I’m using that money to build a down payment nest egg so inside of vanguard each index fund is going to have an expense ratio and that expense ratio just means all of the associated fees it takes to manage that particular fund now what I love about vanguard is it has the lowest expense ratio of any funds out there trying to beat vanguard so here’s.

What I mean I’m invested in the van in the vanguard total bond market index fund and the expense ratio is 0.05 percent annually so that is how much I pay in one year on the money that I have invested in that particular funds also have another fund that I’m invested in the vanguard total stock market index fund and that expense ratio is 0.04 annually with vanguard brokerage accounts there’s no account minimum to open there are no trading fees so if you want to keep buying funds consistently they don’t charge extra for that which.

I did find with the brokerage account on vanguard

I love one thing that I did find with the brokerage account on vanguard is they will assess a twenty dollar annual fee if your account balance in that brokerage account is less than ten thousand dollars however if I’m reading this correctly on their website vanguard says they’ll eliminate that fee if you sign up for e-delivery to accept all of your statements and paperwork electronically online so I don’t see where you could lose with this is a great tool and platform to use if you want to open up a brokerage account I really love using vanguard okay now to demonstrate that capital gains tax that I was telling you about inside the brokerage account I wanted to show you a snapshot from one of my statements on my brokerage account so I’m invested in about 84 bonds and 16 stocks I’m choosing to keep this conservative because.

I want the money pretty soon like within a year or two and I’ve had this brokerage account open since 2016. so I’m keeping it very conservative if you look down at the bottom where it says investment return since 2021 I have earned five thousand six hundred eighty-eight dollars and that’s how much money I’ve earned by investing my brokerage account with the vanguard total bond index fund and the vanguard total stock market index fund so that is the amount of money that I will pay taxes on not the full 48 000 that you see up at the top okay so you’re going to see the most benefit with brokerage accounts if you keep the money in there for at least a year so let’s think at least a year.

If not longer so two to ten years let’s call it is how you’ll want to use your brokerage account for so if you have a financial goal that you want to hit within the next two to 10 years a brokerage account is a great tool now if you want to go longer you absolutely can you can keep money in your brokerage account forever as long as you’re finding it beneficial to your financial goals and you’re using it as a wise investment tool so I’d love to know in the comments below do you have a brokerage account and what are you using it for I personally use mine to grow my down payment fund and that has helped kyle and I earn more than a hundred and twelve thousand dollars combined between our brokerage account and then our high yield savings account we split it pretty 50 50.