Sure, there are investors out there with get rich quick stories. How exciting! But before you picture yourself on your very own yacht, ask yourself what kinds of risks these lucky investors took to get where they are, and would you be ready and willing to take the same risks? Often, when someone earns a very large sum of money, that person invested quite a bit of money initially and faced very high risks of generating losses.
Often used as a guideline by multiple investors, the “50-30-20” [1] rule is about dividing up your monthly income by how it is used. So, half your monthly income is used to pay for your everyday needs (groceries, insurance, rent, petrol, ….). The other half is split as follows: 30% goes towards leisure activities (holidays, eating out, going out, ….) and the other 20% is put into savings (future plans, wedding, real estate, emergency fund, ….).
The purpose of this rule is to understand that you need to determine your income and expenditures, then compare them in order to figure out how much to invest. It Is important to set some extra money aside in case of emergency.
There can be quite the difference between theory and practice. Each person is different, and we do not all spent our money the same way. It is important that the amount you want to invest suits your lifestyle. It might be right for you to invest 10% of your income, or possibly 25%. Be sure to try multiple simulations to determine the right amount of investment capital for you.
There is a subtle difference between these two questions: “How much can I invest in the Stock Market?” and “How much will I invest in the Stock Market?”.
The answer to the first question is based on your income, savings and expenditures… while the answer to the second question simply depends on your plans for the future. For example, if you think you want to buy property in the coming years, renovate your home or take a trip around the world, you should limit your investment capital so you do not compromise your other future plans.
In other words, the money you plan to spend in the near future, for example over the next four years, should be deposited into your savings account, and the rest can be invested.
It is important to set an investment goal and to work towards that goal. It should be based on the investment capital at your disposal, and on how you ultimately plan to use the money.
Keep track of your monthly income and expenditures to get a clear sense of how you manage your finances each month.
Plan for future projects and the associated expenditures.
Put the money you will need in the near future securely away in your savings account.
Invest your extra money in a securities account over the long term.
Keep your feet on the ground 😉.
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