Cuapa Asset Management

With the recession now in full gear, it is important to focus more on saving over spending and investing for retirement. Many people realize this and are eager to set aside their earnings for investments which will reap rewards giving them greater financial stability. This begs the question, “How does one budget their money to accommodate an investment?”

To answer this question it is important to remember that being realistic is the key to investment success. Many will buy investment products but use such a large part of their paycheck in doing so that they cannot pay for other costs such as electricity bills, food, and so on, and they end up having to quickly resell what they intended as a long term investment.

Consider a scenario where an investor researches an excellent equity or mutual fund and decides to spend 35% of their paycheck on investing in it. This investor has to spend, say, $30 each way to make their trade with their broker, but they consider the price well worth it as they expect their investment vehicle to rise significantly over the next few years.

It seems like a great investment idea to save a lot for the future, but the investor realizes soon after the investment that they need 80% of their income to pay their bills and purchase necessities rather than the 65% they have left after purchasing the investment.

So what does this investor do? He or she decides to resell a large portion of their investment in order to get money to pay the bills. This means they spent sixty dollars in unnecessary commissions. Perhaps the stock also lost value in the short term, as well, and the investor lost another fifty dollars. It doesn’t take a genius to realize that constantly buying stable long term investments and selling them within the week can be foolish. This principle applies to not just stocks and mutual funds, but any investment which involves a commission.

The best way to come up with an investment budget, therefore, is to first determine all of an investor’s living expenses, and then split the leftover portion of a paycheck into three parts: Emergency funds, recreation, and investments.

First, set aside some money to cover job loss, potential medical bills, or any other disaster. You should set aside a portion of your leftover money in case a catastrophe occurs, leaving it in an FDIC-insured bank account.

Second, budget a portion of your leftover income for recreational expenses. Don’t invest only to discover that you are going to go into debt to cover your expenses for fun.

Third, invest whatever is left. This is your money to use towards your investments, free and clear of any worries about needing it for future financial obligations.

If you follow this rational approach to creating an investment budget, you will be able to grow your money over the long term without having to constantly worry about digging into it.