The first step: personal finance

There is one important rule when it comes to investing: only invest money that isn’t needed for anything else. Never invest money you need for paying bills and never invest money from a loan! Ensure that you can live your life without trouble even if you lose money on the stock market.

What it comes down to is that your personal finances have to be in order before you proceed to invest on the stock market. Only then can you accurately assess how much is left to put into stocks. Maybe money is so tight that there is no room for investing. In that case some tips to save money might be in order. A quick Google on “money saving tips” shows an extreme amount of results.

To know how much money can be invested, it’s necessary to balance income and expenses made. Try to balance income and expenses over a standard time-period, for instance: the upcoming month. Make sure to include every expense that needs to be made and try to make realistic estimations if you don’t have an exact amount for some expenses. If the result from the calculation “income minus expenses” is larger than zero: congratulations! You now have money to invest on the stock market.

Table 1: Example balance between income and expenses for one month
Income Expenses
Salary 2500 Mortgage/Rent 1000
Bonus 1000 Insurances 400
Allowances 200 Electricity 100
Other… 500 TV/Internet/Phone 100
Food 400
Clothing 200
Gifts/Parties 50
Medical costs 50
Savings for that nice TV 100
Other… 200
Total 4200 Total 2600

Creating a balance as shown in table 1 is important before investing any money on the stock market. Otherwise you might be investing money you don’t actually have. Never assume invested money will win you back the amount needed to pay bills with. It is always unclear what the future might bring, even when every analyst is super positive.

Making a balance can be done on the back of your hand or in Excel. Some banks can also do it for you. However I would like to use this paragraph to blatantly advertise the application I use personally. It’s called You Need a Budget (or YNAB) and lets you easily balance income and expenses on a monthly base. The software will keep track of all expenses so you can easily follow spending trends in graphs and tables. The software does cost money, but is well worth the expense in my opinion. Their method with four clear rules makes saving money and getting out of debt a lot easier.

In conclusion: don’t let your investing career become a stressful endeavor by spending money you don’t actually have. Balance income and expenses and realistically assess how much free money you have for investments. Look before you leap.

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