Determining how much Money you should Invest

How much should you invest depends on several factors. The most important one is you. No one can answer that for you. Each person’s situation is unique and needs to be treated as such. If someone tells you how much to invest than it’s like telling you to see a criminal lawyer when you are making out a will. There are several factors to consider. The first is how much do you have to invest? The next is what is your monthly income,. How much of that do you want to invest? There are other factors as well. Factors such as short and long term goals come into play. Your tolerance for risk plays a big role in your decision even age and family may have a bearing on your decision. How much to invest is never an easy one to make and in the end, no matter what anyone says, you have to make that decision for yourself. You can make a better decision if you are informed and have a better understanding of what’s involved. In order for that to happen lets look at each of the aforementioned factors and see how you can apply it to your own situation.

Let’s look at the first factor. It is important to consider your assets and liabilities. Assets are what you own these can be anything of value; property, savings account, certificate of deposits, paintings etc. Your liabilities are what you owe. These can be mortgages, bank loans, car loans, credit card etc. Please don’t get liabilities confused with expenses as it is easy to do. Expenses are something you will always have. You will always pay a gas bill or an electric bill. Once your house is paid for it is paid for good, unless you put another mortgage on it. It is important to know your liabilities because by subtracting it from your assets you can get your net worth. Some accountants call it net working capital (nwc) and it is important to know.

Not only is it important to know for investment purposes but it shows how solvent or insolvent you are. Solvency is a key to determining your tolerance for risk. One of the differences between savings and investing is that savings involves very little if any risk. If you put $10,000 in a mattress and don’t touch it for ten years, you will still have $10,000. It may not be worth $10,000 but you will still have it. Investing involves risk and those risks are directly related rewards, the greater the reward the greater the risk, Risk tolerance is how much of your net worth you feel comfortable losing should your investments go south and you don’t reach your goals.

Everyone should have financial goals. These goals should be both short term and long term. They should not be independent of each other but some of your short term goals should support your long term goals. The reason that goals are important in determining how much you should invest is because they have a relationship to age and family.

When you invest you should invest for a reason not just to have money. Most people invest so they can live comfortable after they retire or so they can leave something for their children and grandchildren. While these factors alone will not determine how much to invest they are useful because it will help you to determine if your goals should be directed to savings or investing. If you are young and single or just starting out with a family, you should be more concern with investing and making your money grow. If you are in your middle ages and your family is established your goals should be more directed to a combination of savings and investments. Lastly if you’re approaching retiring age you should concentrate more on saving. What investments you do make should be to generate income.

One of the factors that I mentioned at the beginning is how much income you have. By income I don’t mean income from investments you already have but income from work. Income from investments should be reinvested. Income from work is used to pay bills and other living expenses so it is an important consideration. I wrote an article on the importance of paying yourself first and what I said than still holds true. Put some money away before you pay any of your bills. But pay your bills before you make any investments. It is no use to buy stocks and bonds if you are walking around in the dark. One more thing I should mention. Don’t forget about the here and now.

The future is uncertain and none of us knows what is in store for us. My point is this, don’t deny yourself or your loved ones today’s simple pleasures for what you may not be able to enjoy tomorrow.