I don’t enjoy using the same old “invest only what you can afford to lose” since that brands investing with the same brush as gambling. To me, investing in the stock market is not gambling, not unless you attempt to do active trading to make a buck in quick turnarounds. Still, you should only invest what you can afford to lock away in a vault.
Investing comes last
Investing your money should be last on your list of priorities. By priorities, I’m talking about:
- Rent or mortgage.
- Emergency fund.
- Credit accounts.
You should never start investing unless you’re debt-free. The return on investment compared to the interest rate applied to most credit cards is simply uneconomical and would actually lose you money in the process. Think about it, let’s look at the following example, comparing a modest investment portfolio against a credit card.
- Debt: £2,000
- Interest rate: 12%
- Annual charge: £231
- Invested: £2,000
- Performance rate: 5%
- Annual gain: £100
I’ve used modest rates for both the interest applied to our credit card, which can oftentimes be higher, as well as the performance (or growth) we could expect with our investment portfolio. Usually, you’ll want to score 5% or more, but it’s often you’ll see below this with more volatile or less performing stocks.
In our example, for one year without investing further into our portfolio or spending more on our credit card, we’d see an annual charge of approximately £231 for our debt, while the portfolio of investments would only see a gain of around £100. This is why I recommend clearing your debts before investing.
Credit card debt is huge, especially in today’s consumer world. Everyone wants a new vehicle, mobile device, 70-inch TV, and games console. Most of these products are purchased on some form of credit, be it a card or a loan of sorts. Being able to effectively budget your expenditures each month is a sure way to build wealth.
It may seem counterintuitive, to begin with, but this is honestly the best route to take. You’ll feel much better down the line when you’re able to start investing with vastly more capital thanks to being debt-free.
Only invest what you can afford
Once you’re debt-free, the question arises: how much should you invest each month? An investment portfolio is usually better than a savings account, providing more returns and some other notable benefits. It’s advised to invest between 10% and 15% of your monthly income. If you manage to bring in £2,000 from your job, try and set aside £200 for some shares.
This isn’t possible for everyone and depends largely on how many commitments you have. Work out how much you need to have to go to essentials outgoings and then budget remaining cash for investing and having a good quality of life. It’s important you never invest more than you can afford.
Don’t cut yourself short in the month ahead and don’t ever go into your overdraft to purchase one more share in your favorite company. It’s not worth the additional stress and the entire reasoning behind dividend-focused investing is to enjoy a less stressful life with your money working for you.
Don’t day trade
It may be amusing to scroll through the Wall Street Bets sub-Reddit and see just how much everyone is seemingly able to make. Options and day trading should be a sure way to increase your wealth so you can buy more shares, right? Wrong.
Day trading is gambling. Investing is not. If you fancy yourself some quick profit by timing the market and trying to bet against future trends, you are more likely to lose everything than gain anything at all. Remember: people love to show off their gains, but never publish their losses. It’s all down to luck.
What you should do instead is invest in companies you believe in, building up a steady portfolio of safe dividend-paying stocks. Try out my free dividend tracker to see just how well your portfolio is performing.