In this article we’re going to go over strategies for money management as applied to investing.
These days with rising costs and salaries that don’t seem to rise in proportion to those costs, it is rare to even have any money left over to invest after the bills are paid. However, if you are one of those fortunate few who does have some money to play with, here are some tips for managing your money in relation to your investing.
The one thing you don’t want to do is use any more money for investing than you can afford. So the first thing you have to do is figure out how much you will need to pay the mandatory bills. Then you need to figure out how much you want to add to that amount so you can live the life style you are comfortable with. Finally you want to add about 2% of your yearly salary to that amount for emergencies because they can and do pop up.
What’s left over is what you have to invest with yearly.
Divide this amount up into quarters. Let’s say you have $10,000 that you can comfortably invest in a year. By comfortably, that means should you lose that money it will not put you in hardship. Okay, you now have $2,500 to invest each quarter. There is a reason you want to do this by quarters.
The next thing you want to do is decide what you are going to invest in. This is where most people fall into the trap of throwing all their eggs in one basket because somebody told them about a “sure thing.” There is NO sure thing when it comes to investing unless you are putting your money in a low yield savings account. That is not investing. That’s saving and actually with today’s interest rates that’s letting your money just waste away. There is almost no benefit to putting your money in a savings account, even a short term CD. The rates are pathetic.
What you want to do is take your $2,500 and break it up into 3 parts of $833 each. After doing that you want to take one part of your investment money and put it into something relatively low risk, like bonds. Current bond interest rates are between 4 and 6%. As for the term, that is up to you. Some people like 30 year bonds that will provide for their retirement years. Other people like bonds that will give them a return in a year or so. Choose what is right for you.
After you choose your low risk investment, then go for something with a little higher risk with your next $833. Maybe something like a mutual fund. Mutual funds are a little more risky because they are a combination of stocks and bonds. Because the mutual fund is diversified in itself, this cuts down on the risk. If one part of your mutual fund loses money another part will more than likely make up for this loss.
Finally, with your last $833 choose something high risk, like a hot stock that looks like it’s going to take off. Obviously do your research on this so you pick a stock that will give you the best chance of making a good return quickly. Make sure you watch this stock daily. Pick a point where you want to sell. For example, let’s say you bought the stock at $10 a share and you bought 80 shares for $800. You may decide you want to sell and pocket your profit once the stock reaches $20 a share, thus doubling your money. If this is a very hot stock this could happen in a matter of weeks. That’s a good return for a few weeks work. On the flip side, make sure you pick a share amount that you won’t let the stock go below before you sell, say $5 per share. This way you only lose half your investment.
What you then do is just repeat the above procedure each quarter. Before you know it you will have quite a nice little short term and long term nest egg accumulated.
——————————————————-
Michael Russell
Your Independent guide to Money Management
——————————————————-
