Investing in shares is risky business.
Don’t let anyone tell you otherwise.
Sure, there are ways to minimize your risk and put the odds in your favor. But for every stock that explodes for a 1000% gain, there’s a stock that implodes, leaving its shareholders with a 100% loss.
I know this. I’ve experienced both outcomes firsthand.
So, before you open a brokerage account, you need to ensure your finances are strong enough to absorb the blow when disaster strikes one of your shares.
This will allow you to take reasonable risks with confidence — knowing that you and your loved ones are safe no matter which direction the stock market is going.
The key to financial stability is simply to spend less than you earn.
Here’s how you do it.
1. Track all money that enters and leaves your life
Start by becoming fully aware of all the money that flows into and out of your hands.
Get a good pen and a small, durable notebook. Carry them with you wherever you go, and write down everything you buy.
Taxi fare, chips, school fees, top-up cards, rent. Jot down every purchase — big and small — in your notebook at the exact same time you pay for it.
Make sure you note precisely how much you spend on each item. Rough estimates just won’t do. Don’t round to the nearest dollar.
Every penny. Every shilling. Every kobo. Every thebe. Must. Be. Recorded.
Do you have any automatic payments coming out of a bank account? Make sure you note all of those, too.
And, of course, don’t forget to track your income at the same time. Wages, income from selling vegetables from your garden, even the lost coin you find in the street.
(Note, this isn’t an original idea from me. Many financial advisers will suggest you start with a similar system. I was particularly inspired by Your Money Or Your Life by Joe Dominguez and Vicki Robin.)
2. Add it all up at the end of the month
When you reach the end of a month, add up all of your income and expenses.
Break your expenses down into a few helpful categories and tally up the amount you spent on each one.
Here are the categories Britany and I use:
- telephone and internet
You probably spend money on things that don’t fit in any of these categories. Or maybe you think it would be helpful to break them down into sub-categories.
That’s fine. Personalize them according to the way you live your life.
The important thing is to see where your money comes from and where it is going.
3. Review the results and note three things that surprise you
After you’ve summed all of your income and expenses, take a close look at the totals for each category.
Is there anything that jumps out at you? Is there anything that makes you look twice? Anything that puzzles you? Anything that embarrasses or disappoints you? Anything that makes you cheer a little bit inside?
On the next page of your notebook, take a moment to write down three things you find remarkable about your financial life in the previous month. You can write down more than three if you want. But write at least three.
When you’re finished, turn to the next page, and continue tracking your income and expenses.
4. Chart your income and expenses over time
You may have heard the old saying that “What gets tracked, gets improved.” In most things, I’ve found this to be true.
(Although no matter how much I track my consumption of jelly beans, it seems to go up and up every month. Hmmm… maybe that IS an improvement!)
My sugar addiction notwithstanding, close monitoring of a behavior typically leads to gradual change for the better.
This is why this next action item is so important.
First, you’ll need a piece of graph paper. If you don’t have any handy, you can modify and print this one.
This is where you will chart your monthly income and expenses.
At the end of each month, take a green pen and plot your total income on the graph.
Then mark your total expenses with a red pen.
Connect the green and red dots after each month and pretty soon your chart will begin to look something like this.
Now, hang the chart somewhere in your home, where you will see it often. Maybe behind a cupboard or closet door.
You want to see it often enough that it reminds you of the progress you are making.
(And, yes, if you’re savvy with Excel, you can have the computer make this chart for you and skip the green and red pen. But make sure you print out your graph each month and hang it somewhere that you will see it frequently.)
5. When you consistently earn more than you spend, move on to the next step
We’ve reached the decision point.
After several months of tracking your income and expenses, you should have a pretty good idea whether your income is greater than your expenses.
If it’s not, don’t panic. Look closely at your expense categories and see whether there are easy places to reduce your spending. And, if there are ways to boost your income, explore those, too. Continue to monitor your expenses and see if the red and green lines are any closer together a few months from now.
Is your green line consistently above your red line?
Congratulations! You’re ready to move on!
Proceed to the next step here. But be warned… a monster awaits!
It’s your turn
Does this seem like a good first step toward getting your financial house in order? Let’s hear your thoughts in the comments!