Before you invest in the stock market you need to do this. You need do some math first
How much are your monthly expenses? Include everything, house mortgage, car loan, utility bills, groceries, clothing, entertainment, etc. Take that number and multiply it by 12. For example, if your monthly expenses are $3.000 you need at least $36.000 in savings before you even think of investing in the stock market. Why? Because this is your emergency fund.
Emergency fund
What is an emergency fund? It’s a safety net. That means if you get fired today and you don’t have any other source of income, you have 12 months of savings until you get another job. Some people even have 24 months of savings. If you can save for 24 months even better, personally I have 12.
Why the emergency fund is important? Because it will protect your investments. Imagine you don’t have an emergency fund and you invest all your money in the stock market and after one week you get fired. What will you do? You will start closing your positions to get cash out of the market to pay your bills. There goes your investment plan.
But if you had an emergency fund of 12 months of savings, you wouldn’t close your positions, and probably in the next month or two you will land a new job or maybe start your own business. And the important thing, your investment in the stock market is still there, intact.
What’s the next step?
Congratulations, you managed to create your emergency fund. This is the most difficult and time-consuming part. Now you can start investing.
Now let’s divide your salary income into three parts, necessities, savings, and investments.
Necessities is your cost of living. Bills, mortgage, clothing, food etc. You can’t avoid it. You can be frugal and minimize spending but you can’t eliminate it. The less you spend though the more you can invest.
Savings is optional in this stage, you can put extra money here if you want to grow your emergency fund or you want to save for another type of investment, e.g a down payment for a real estate investment.
What is left after the monthly necessities and savings you can invest it straight away.
Of course, you can do it in reverse order. It’s much harder but if you can do it, it’s totally worth it! That means that you set a fixed percentage of your salary that you will invest no matter what, and from what is left you make sure that you will meet your obligations during the month.
For example, if you have a salary of $4.000 and you decide that you will invest 50% of that every month no matter what, that means that you will invest $2.000 and the remaining $2.000 are for necessities and savings.
This is your plan before you invest
So, this is the plan you need to follow before you invest in the stock market. And remember every investment starts with one stock, and then you add another one and another one and slowly you build your portfolio. The sooner you start the better.
I currently make my investments with Interactive Brokers