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Lesson 3. How Much Do You Have to Invest? - Pg. 14

14 Chapter 3. How Much Do You Have to Invest? In this lesson you will learn where investing fits into your total financial picture and how to determine how much money you have to invest. Determining Your Overall Financial Picture Investments can be a very important part of your overall financial management. In order for your investments to be good financial management decisions, it is important that you have a very clear picture of how much money you have and how much of it can be invested. This is not an arbitrary decision, but one that should be made after considering several factors including those discussed here. Failure to earmark your money in advance could prove disastrous, because without a mone- tary plan you may find yourself inappropriately allocating money to the wrong purpose. Again, in- vestments are only one portion of a good financial management plan that should also include · · · · · Determining income Determining expenses Amassing savings Paying down debt Reviewing your credit report/establishing credit Caution Deciding how much of your income is disposable and can be earmarked for investing should not be done arbitrarily but only after considering how much savings you need, what your expenses are, and how much debt you have. Think of your plan as a budget. Although the word budget in itself is distasteful to many people, a budget can be used to make life a lot easier, rather than more constrained. A budget is nothing more than determining how much available money you have and the total of all your financial commit- ments. By knowing this information in advance, you can decide how much of your available cash you wish to allocate to savings, expenses, and debt. Doing this ahead of time will make your life easier since no unpleasant surprises will arise later on that you must handle. Once you've decided how to allot your money, you can determine how much of your disposable income is available for investing. Again, by planning ahead, you avoid placing yourself in uncomfortable financial circum- stances later on. Sufficient Savings Before allocating money for investing, your first and most important task is to ensure that you have amassed sufficient savings to see you through any emergency. An amount equal to three to six months' living expenses is the general rule. Setting aside this sum is absolutely essential, because once an investment is made, it should be left alone to work its magic and increase its value. Like checking a cake while it is baking, repeatedly withdrawing and redepositing stock investments will all but negate their progress.