Thursday, November 13, 2008

How much should one invest?

Many newbie investors (including me at first) think that they should invest all of their savings (or almost all in my case). This is a mistake; it is not necessary true. To determine how much money you should invest, you must first determine how much you actually can afford to invest, and what your financial goals are.

In a previous post, I mentioned that one should invest with money one do not need in the near future. Take a look at how much money you can currently afford to invest. Make sure you don't cut yourself short when you lock your money into investments. It is important to have a few months worth of savings left to survive for a few months (in case you lose your job, or etc). This amount varies depending on your age. Of course, the younger you are, the smaller this amount.

Begin by planning your own finance. How much should remain as liquid as possible? How much can be used for long-term investments? How much of your income are you going to spend/save/invest every month? Every little things count. Investment portfolios are built over time, not overnight.

With a financial planner, you could/might plan your finances better. But, in my opinion, I would rather learn to be the financial planner of my own finances. Learning, to me, is additive. It's hard to find a financial planner who bothers more about your financial health than the commissions he/she will be getting. Just see the recent Lehmanns' Minibond saga.

In my case, I'm 25 years old. Putting aside $100 for transport a month, $600 for food, and probably $300 for misc stuff like hp bills, etc (I'm the type that has very little craving for anything hip or in fashion anyway), that's about $1000 a month. I stay with my parents, so no housing loan to settle. No car since I stay very near my workplace. So, together with $500 household contribution, my monthly expenses totaled up to around $1500. Let's be more generous with myself and round it up to $2000 a month. That would be $12k I need to have liquid or in fixed deposit, which can be easily withdrawn. Since I have more than that amount (accumulated from army and tuition assignments) in fixed deposits and money market funds, I have little worries investing the rest of my income.

No matter what, remember: Never ever borrow money to invest, and never ever use money that you have not set aside for investing. It is a deadly sin, a sin that could bankrupt you.

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