Deciding where to put your money can be complicated. If you're trying to balance where your funds should be for the best financial benefit, you may be wondering if it's possible to have too much money in your brokerage account.
The reality is, unlike other kinds of financial accounts, you can't really go wrong with a bigger brokerage account balance. However, while you want to put as much money into a brokerage account so you can invest in the market, you don't want to end up with more risk than you should take on.
So while it's not really a problem if you have a big brokerage account balance, it can be a problem to have money invested with a broker when it should be accomplishing some other task.
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Here's why you can't have too much money in your brokerage account
Putting your money into a brokerage account allows you to invest in stocks. You can buy shares of individual companies if you want. Or you can opt to purchase exchange-traded funds (ETFs), which are traded like stocks but track the performance of a broader financial index (which can make them easier to invest in).
The stock market has historically been the best way for average people to invest because you can usually earn a pretty good return over time with minimal risk if you make smart investments, such as buying shares of an S&P 500 ETF that tracks the performance of around 500 large U.S. companies.
Since you can expect a good return over time if you make informed choices, you can't really have too much money in your brokerage account. After all, you want as much money as possible earning the highest possible returns. This is different from, say, keeping your money in a high-yield savings account. If you put too much in savings, you end up capping your potential returns in a way that can hurt your wealth-building efforts because you can only earn so much on that cash, depending on your account's APY.
You can have too much in a savings account
Say, for example, you have $50,000 in a brokerage account earning a 10% average annual return over 30 years. (This is in line with the stock market's average annual return over the last 50 years.) That $50,000 would turn into $872,470 over 30 years. If you instead kept it in a high-yield savings account and earned just a 4% average annual return over that same time period, you'd end up with only $162,169.88. It's also important to note that savings account APYs fluctuate, and it's unlikely that you'll see a 4% return over such a long period.
Since you don't want to lose the chance to earn the returns needed to build wealth, you only want to put money in savings that you think you'll need soon and can't take the risk of investing in stocks. So your savings account balance could definitely be too big. A bigger brokerage account balance, though, would just end up allowing you to invest more over time, and you could end up a lot richer as a result.
Some money doesn't belong in an investment account
While investing as much as possible in a brokerage account isn't a bad thing, you could run into problems if you're putting money into one when it is needed for something else.
Your emergency fund and any money you may need in the next three to five years should be in savings rather than in a brokerage account because you need to keep that money safe. You don't have time to wait out a market downturn and recovery if you'll need the cash to make a down payment on a home or fund another large purchase.
If you have money in a brokerage account that you can't risk losing, you should move it to a savings account where it will be safe and accessible if you need it. But if you already have a fully-funded emergency fund, are saving for short-term and mid-range goals, and don't have a lot of high-interest debt you need to pay back, then you're good to go and can put as much of your spare cash into a brokerage account as possible without worrying about a large balance.
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FAQs
Investing in a brokerage account can help you build wealth. You can earn a better return in a brokerage account than in most other assets, so you can't have too much money in one. However, you do need to maintain the right asset allocation, which means you need to have a sufficient amount of money in savings too.
Is there a limit to how much money you can have in a brokerage account? ›
You may deposit as much money as you want in a brokerage account, and you can invest in any of the assets or securities offered by your broker. “You can put the money in whenever you want, take the money out whenever you want,” Boersen says. “And there's really no limit on what the investment options are.”
Should you keep all your money in a brokerage account? ›
If you've got a large chunk of cash, you might secure better returns outside of a brokerage account. You could lose money. If your money is swept into a money market fund, that cash won't be insured by the FDIC or SIPC. It's possible to lose money.
Is it safe to keep more than $500000 in a brokerage account? ›
They must also have a certain amount of liquidity on hand, thus allowing them to cover funds in these cases. What this means is that even if you have more than $500,000 in one brokerage account, chances are high that you won't lose any of your money even if the broker is forced into liquidation.
How much cash should you keep in a brokerage account? ›
Cash and cash equivalents can provide liquidity, portfolio stability and emergency funds. Cash equivalent securities include savings, checking and money market accounts, and short-term investments. A general rule of thumb is that cash and cash equivalents should comprise between 2% and 10% of your portfolio.
Do I pay taxes on withdrawal from brokerage account? ›
When you earn money in a taxable brokerage account, you must pay taxes on that money in the year it's received, not when you withdraw it from the account. These earnings can come from realized capital gains, dividends or interest.
Are brokerage accounts taxed as income? ›
Taxable brokerage accounts. An ordinary brokerage account that is not a retirement account is a taxable investment account. If you make money because your investments go up in value, or because your investments pay you dividends or interest, this income will be taxed.
What is the downside to a brokerage account? ›
Downsides of a standard brokerage account
Since it's a taxable account, you'll have to pay taxes on earnings in your account, including capital gains and dividends.
Is it safe to keep millions in a brokerage account? ›
However, it may not be the best idea to keep more than $250,000 in cash at a specific brokerage firm. “But when your money's fully invested, you do not have a risk,” Clark says. Beyond that, investing through a company that charges you high or even moderate fees is much more likely to impact your long-term wealth.
Why no one should use brokerage accounts? ›
If the value of your investments drops too far, you might struggle to repay the money you owe the brokerage. Should your account be sent to collections, it could damage your credit score. You can avoid this risk by opening a cash account, which doesn't involve borrowing money.
Common types of securities include bonds, stocks and funds (mutual and exchange-traded). Funds and stocks are the bread-and-butter of investment portfolios. Billionaires use these investments to ensure their money grows steadily.
What brokerage do most millionaires use? ›
Best Brokers for High Net Worth Individuals
- Charles Schwab - Best for high net worth investors.
- Merrill Edge - Best rewards program.
- Fidelity - Best overall online broker.
- Interactive Brokers - Great overall, best for professionals.
- E*TRADE - Best web-based platform.
Yes, in addition to SIPC, Schwab clients receive an extra level of coverage through "excess SIPC" insurance protection for securities and cash. This helps ensure claims will be covered in the event of a brokerage firm failure and funds covered by SIPC protections are exhausted.
How much money do I need to invest to make $1000 a month? ›
Calculate the Investment Needed: To earn $1,000 per month, or $12,000 per year, at a 3% yield, you'd need to invest a total of about $400,000.
How much is too much cash in savings? ›
How much is too much? The general rule is to have three to six months' worth of living expenses (rent, utilities, food, car payments, etc.)
What is the 50 30 20 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals. Let's take a closer look at each category.
Is it safe to save money in a brokerage account? ›
These accounts are usually FDIC-insured, so when the time comes, the money will be there.
Should I keep my money in a savings account or brokerage account? ›
A savings account is the ideal spot for an emergency fund or cash you need within the next three to five years. Good for long-term goals. Investing can help you grow money over the long term, making it a strong option for funding expensive future goals, like retirement.
