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There are several reasons why it is of particular importance to determine your expenses when attempting to calculate how much disposable cash you have for investment. The most obvious reason is that you need to keep enough money to pay your bills.
Plain English
It may seem obvious, but
determining your expenses
is the process of
Another reason for figuring out your expenses is that you will gain a clearer understanding of your own present financial health. You will quickly realize how much of your money you are spending and where and on what you are spending it. Armed with this knowledge, you are in a much better position to make investments relative to your overall financial picture.
For example, you may realize that you are spending excessive amounts in one particular area and you may decide to try to cut back a little there to free up some cash. This newly available cash could be used to invest in stocks. However, the amount invested wouldn't even be available had you not determined your expenses and then subsequently noticed that one expense area was particularly high. So, determining your expenses in advance was directly responsible for your ability to make that investment.
The last reason for determining your expenses is simply good financial management, which includes getting rid of debt and acquiring sufficient savings to deal with any emergency. Good financial management is the basis for effective stock investing. You need to be able to effectively manage your daily finances before venturing into the more complicated world of investment.
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Having confronted your fears and determined how much you have available to invest, you are almost ready to begin your career as an investor. However, since money is involved, it's not a bad idea to first try a dry run and apply the information you learn here to a fictitious portfolio of stocks.
This process, better known as paper investing, is a particularly good method for getting started in investing. Through paper investing, you as a potential investor can in absolute safety apply your new knowledge to real-life scenarios, later discovering whether your decisions were correct.
Use the knowledge you gain in this book to decide upon your standards for selecting an investment strategy, choosing stocks, and achieving a portfolio mix. Write these particulars down; then pick investments or stocks that meet all, or at least most of, your stated criteria. Monitor these investments over a period of time (a couple of weeks or months) to see if your initial decision remains a good one.
TIP
Amassing a fictitious portfolio, or paper investing, based on information you have learned is a good idea for new investors. Analyze your portfolio's performance to determine how good your initial investment decision was.
You can begin your paper investing now, and increase your selections as you continue to learn new and relevant information throughout the book. Paper investing will make you more comfortable with the real investment process and will provide real-life examples to
Investments are only one part of responsible financial management.
Before investing, you should have savings of three to six months of living expenses.
Lower or get rid of debt. The interest you pay on it may negate any profits you make from your investments.
Determine your income and expenses so that you can appropriately allocate your money.
Before investing, try a dry run by charting imaginary investments'
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