Thursday, November 18, 2010
If you have trouble finding the money to fund a consistent investment plan, consider using this strategy.
Most of us learned the basic formula for determining profitability was:
Revenue - Expenses = Profit
This is the basic structure of an income statement. Accounting necessities make it somewhat more complicated for most businesses, but it still gets you to the "bottom line," which is Profit (or Loss if Expenses exceeded Revenue).
We use the same formula to operate our personal "businesses" as expressed in our cheque books (although we usually use the term "income" to mean the same thing as "revenue," which is not true in financial statements). How much did we make and spend and what's left for investing.
The problem is the income statement is a report that reflects what has happened, and not an operating philosophy, yet that's how we treat it.
If you want to invest 10% of your take home income each month, the Income - Expenses = Investing Fund formula usually won't work.
Something will come up and you will spend the Investing Fund before you know it.
Try this formula instead:
Income - Investing Fund = Expenses
This formula forces you to "pay yourself first," by funding your Investing Fund before the other expenses. That way you know your Investing Fund will not get lost in the daily grind of living expenses.
The other side of this formula is a forced discipline on holding your expenses to no more than 90% of your take home pay.
You can even automate the process by having 10% (or any amount you want) debited from your bank account based on cheque pay period and put into a money market mutual fund or other savings instrument until you are ready to make an investment. This eliminates the need to write a cheque and the temptation to skip making a deposit "just this one time."
Add in bonuses
As you get bonuses, extra commissions, and so forth, put 10% or more of them into your Investing Fund also.
Once you get into the habit of automatically putting aside 10% (or whatever percentage you want) into an investment fund and living on 90% of your take home pay, it will seem like the most natural of circumstances.
If you own a small (or not so small) business, this same strategy works just as well. Set a profit target and that comes off your income. Whatever is left must cover your expenses. Revenue - Profit = Expenses.
Follow this formula and you will have a great chance to succeed.
Finding money to invest is a matter of making it a priority. Pay yourself first and learn to live off what is left. You will always have money to invest.
Finding Money In Your Budget For Investing In Stocks