Two calculations to help you decide how much to invest
Two financial snapshots help ear-mark cash for investing
So, how much? An enduring question. Investing what you can afford is vital if you’re to avoid taking too much risk. But working this out is not as simple a task as looting one’s savings account. Selling investments at the wrong time because you hadn’t planned for emergencies is a position you don’t want to be in, and sleeping soundly at night with investments riding around the markets involves understanding your finances and ensuring contingency buffers are in place.
To answer the question of where you are financially, you need to take a financial snapshot. We can lend some wisdom from two financial statements public companies use to convey their performance: the balance sheet and the income statement. They will give you an idea of your net worth – the difference between your assets and liabilities, and your net income – earnings minus any outgoings.
Understanding your net worth
First, we look at the split between your assets and liabilities, or in other words: what you own versus what you owe. Think of those with reasonable value, be realistic, and consider the maturities of any financial commitments. Here’s an example of what we mean:
Calculating your income
Next, we need to take a look at your monthly cash-flow: what’s left after deducting outgoings, and not just bills – include all the commitments you’ve identified above. It can take a bit of time to look through spending trends and we continue our example below, but if you’d like some help there are plenty of ‘budget calculators’ online: we like Nationwide and the Money Advice Service.
Using these two snapshots you should to be able to begin to assess how to divide your cash between savings and investments, from what you have now and what you can spare in your monthly earnings.
Deciding how much to invest is for you to decide, but before that, we think some contingency plans are vital. We call it Housekeeping.