He recommends a straightforward approach you can use to invest while also saving toward important expenses.
Stock market investing is the most proven way to build wealth, and you get the best results when you do it regularly. If you make consistent deposits to your brokerage account, you can keep investing more, which makes a big difference over time.
But how much of your money should you put in your brokerage account each month? Financial expert Brian Feroldi is known for simplifying how to invest in the stock market, and he recently answered this common question.
How much to put in your brokerage account
For building wealth, the approach Feroldi recommends is splitting any extra money you have into three equal buckets. You then allocate that money as follows:
- One-third to your brokerage account
- One-third to a mortgage paydown fund
- One-third to an irregular expense fund (a car, a vacation, etc.)
For example, if you have an extra $750 per month, you'd put $250 in your brokerage account, $250 toward your mortgage, and $250 toward savings for irregular expenses.
Feroldi says to mix and match these as you see fit. You could do a different split, like 40-30-30, if you want to put more money toward stocks. Although he suggests going with equal thirds, part of personal finance is figuring out what works best for you.
You may have noticed that this recommendation is for your extra money. That's because it actually follows several other steps in Feroldi's personal finance framework. Wealth building is important, but there are some other prerequisites to take care of first.
What to do first
A brokerage account is a good place to put money when you don't have any more pressing financial needs. But it shouldn't be the first thing on your list of priorities. For example, if you don't have an emergency fund or you're dealing with expensive debt, those are both better starting points than investing in stocks.
Here's what you should do with your money before putting anything in a brokerage account:
- Build an emergency fund. Start by saving one month's worth of living expenses. After that, you can aim for a three-to-six month emergency fund or longer, depending on how much emergency savings you need.
- Eliminate high-interest debt. Put every dollar toward high-interest debt, such as credit card debt, until it's gone. If possible, refinance this debt to get a lower interest rate.
- Contribute to retirement accounts. These offer tax advantages over a brokerage account, so invest with them first. If your employer offers a 401(k) with a match, contribute at least enough to get the full match. It's also smart to invest in either an individual retirement account (IRA) or a Roth IRA.
Two other things Feroldi recommends, if applicable, are maxing out a health savings account (HSA) and funding your children's college education. You may also want to pay off all your non-mortgage debt, although when you do this depends in part on the interest rate.
To recap, Brian Feroldi recommends putting about one-third of your extra money into a brokerage account, where you can use it for stock investing. However, that's with your extra money, after you've taken care of all of the following:
- Fully funding your emergency savings
- Eliminating non-mortgage debt
- Maxing out IRA contributions
- Getting your full employer match on a 401(k) or maxing out your 401(k)
- Maxing out your health savings account (if applicable)
- Contributing to college funds for your children (if applicable)
Completing those steps will put you in a great financial position. After that, investing through a brokerage account will allow you to grow your wealth more quickly. Also, make sure to go with one of the top stock brokers so you have the features you need and don't pay any unnecessary fees.
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