Every time you find a good investment idea, how much can and should you invest? The answer to this question is rather personal. You need to answer it on your own. No one can answer this for you. Why?
This is an important question because deciding how much to invest depends on two rules:
- How much can you save after paying all your expenses?
- How much money can you afford to lose?
Invest what you can save
How much you can afford is pretty clear. Don't borrow to invest. You never know what will happen in the stock market tomorrow. You don't want to invest the money you don't have and then get into a situation where you have to pay high interest to return the borrowed money.
Invest what you can afford to lose
The second rule may have given you the jitters. Invest as much as I can lose? What? Am I mad? No, bear with me. I'm not saying you will lose the money you are about to invest. However, you need to be mentally ready to lose all of that money. Investing is about generating wealth, and wealth generation is about giving you the peace of mind and set you for a better life. You don't want to invest the money that if you lose some of it, you will lose sleep over it.
If you follow that logic, you should avoid investing the money you need for your day-to-day life. If the stock market happens to fall tomorrow, and you need to pay your rent the day after, you are forced to sell a perfectly good investment on the cheap.
The stock market can fluctuate up and down every day, and you don't want to
Invest the amount of money that you can afford to save, and you would not lose sleep if you lose all of it. This means you don't invest the money you’d need for your rent or mortgage next week or month. The stock market is volatile. You could make the best decision, and your country gets into a war with another country, and suddenly the market crashes. You cannot predict that, and as such, you shouldn't invest the money that if you lose it, you also lose sleep over it.
Action: Before doing anything, identify your investment budget. It can be $10 per month or $1000 per week. It doesn't matter how much, what matters is that you think through the logic and create your investment budget.