The following is a guest post by Miss T, who blogs at Prairie EcoThrifter. She grew up in the Canadian prairies and still lives there today. She is passionate about saving money, being healthy, looking out for our environment, and most of all having fun. Her blog shares tips on how you too can live a green, debt free, and fun life.
One of the big mistakes first time investors make is they think they should invest all of their savings. This isn’t necessarily true nor is it a good idea. To determine how much money you should invest, you must first determine how much you actually can afford to invest, and what your financial goals are. If these two components aren’t aligned then you will
run into problems later on.
First, let’s take a look at how much money you can currently afford to invest. Do you have savings that you can use? If so, great! However, you don’t want to cut yourself short when you tie your money up in an investment. Ask yourself, what were your savings originally for? Was there a goal that you were planning on achieving? Can that goal be postponed a bit? If you don’t ask yourself this question you risk making yourself feel unhappy and unfulfilled which is no way to live.
Also remember, it is important to keep three to six months of living expenses in a readily accessible savings account – don’t invest that money! Don’t invest any money that you may need to lay your hands on in a hurry in the future. This is your emergency fund. Having this fund protects you from going into debt when catastrophe strikes.
So, essentially your first step is to determine how much of your savings should remain in your savings account, and how much can be used for investments.
Next, determine how much you can add to your investments in the future. Your financial situation will change and morph over time so how much you can invest needs to be constantly re-evaluated. For example, if you are employed, you will continue to receive an income, and you can plan to use a portion of that income to build your investment portfolio over time. If you start a side business to pay off your current debt, once your debt is gone, you can then invest this money . The best thing to do is to speak with a qualified financial planner who charges by the hour, to set up a budget and determine how much of your future income you will be able to invest. With their help you can be sure that you are not investing more than you should – or less than you should in order to reach your investment goals.
Lastly, you need to figure out the initial investment amount. For many types of investments, a certain initial investment amount is required. You can find this by doing some research on that particular fund or stock. If the money that you have available for investments does not meet the required initial investment, you may have to look at other investments. Never borrow money to invest, and never use money that you have not set aside for investing. Following these two rules will be your key to successful investing.
So readers, how have you developed your investment plan? What have you found works well?
Editor’s Comments: Thanks for the guest post, Miss T! Good thoughts here. I’m personally a bit more conservative with emergency funds by focusing on 9 to 12 months, but I like the post. Especially agree on your rule of not to borrow to invest. Absolutely! Pay off debt, don’t create more!