The first step to investing: personal finance

Laatste update op 22 mei 2022

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. Good personal finance is crucial.

Personal finance comes first

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.

Tools

There are many tools you can use to create a balance like in table 1. To summarize:

I personally use LibreOffice at the moment. It’s an open source project that tries to mimic the functions of Microsoft Office as much as possible.

A truly dedicated software package for budgetting is YNAB. YNAB is an abbreviation of ‘You Need A Budget.’ In the past it has helped me create a budget from scratch and increase my savings rate. However, the new version of YNAB requires you to pay at least 84 dollars each year. It’s a powerful package, but it will cost you. It makes budgetting a little counterintuitive because in order to save money you need to spend money…

Google Docs also has a spreadsheet application like Excel. One advantage of Google Docs is the fact that you can access your files anywhere. A disadvantage is that you need to trust Google to respect your privacy…

To conclude

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.