Budgeting for investing may seem a daunting task if you have never invested before. How to allocate a part of your income to investing depends on your income, as well as your present life situation and your future plans.
Set up your household budget and your emergency fund first
Educate yourself on investing
Define specific SMART financial goals
Find out about low-cost investments if you only have a small amount to invest
In this lesson, you are going to learn how you can start budgeting for investing.
Now that you have started managing your personal finances by setting up your household budget, your emergency fund and your savings plan, it is time to start budgeting part of your money towards investing.
You might have heard opinions from people around you that investing is only for the wealthy and that you are excluded from investing. Rest assured that those days are over - thanks to digital technology, investing is becoming increasingly accessible to more and more potential investors like yourself, and you don’t need to worry about not having enough funds to get started.
Thanks to digital technology, investing is becoming increasingly accessible to more and more potential investors like yourself.
Formulating investment goals
Have you thought about why you want to invest? Investors have different reasons to invest. Do you want to invest to earn enough money to acquire a property? Or do you want to make certain you have enough money to feel secure when you are old? Or are you investing to ensure you can comfortably retire when you are older? The reasons for investing are as numerous as the investment vehicles available to those interested in investing.
Still, it helps to formulate one or two general investment goals. Here are a few examples for formulating investment goals using the SMART criteria for goal formulation.
Make your goal SPECIFIC: “I want to have enough money to make a down payment on an apartment in the city where I live.”
Now make your goal MEASURABLE: “I want to have EUR 60,000 to make a down payment on an apartment in the city where I live.”
Now make your goal ACHIEVABLE: “I want to have EUR 60,000 to make a down payment on an apartment in the city where I live by buying large-cap stock from Dreamhousedownpaymentmaker Corp. in the city where I live.”
Now make your goal RELEVANT: “I want to have EUR 60,000 to make a down payment on an apartment in the city where I live by buying large-cap stock from Dreamhousedownpaymentmaker Corp so I can start a puppet-making business.”
Now make your goal TIME-BASED: “I want to have EUR 60,000 by the year 2030 to make a down payment on an apartment in the city where I live by buying large-cap stock from Dreamhousedownpaymentmaker Corp so I can start a puppet-making business.”
Educate yourself on investing
Once you have formulated your SMART investment goal, the next step would be to educate yourself on the types of investments available to investors by reading all the articles here in the Personal Finance section of the Bitpanda Academy - from the good old savings account all the way to corporate stock and fractional shares and then to bonds, mutual funds and ETFs.
In the scope of learning about these basics, you will also find out that investors diversify their assets, meaning that they combine different kinds of investments to reach their goals based on risks and rewards, as well as other factors.
Once you have formulated your SMART investment goal, the next step would be to educate yourself on the types of investments available to investors.
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Formulate different investment strategies
After you have found out about the different types of investments available, you may want to assess which investment vehicles interest you the most and whether they are suitable for your SMART goal.
When making your calculations, bear a number of factors in mind:
Investing is not free, so don’t forget to include fees you will be paying for setting up various accounts, stock depositories, trading and all kinds of transaction fees.
Also keep in mind that capital gains (profits) from investments are subject to taxation - educate yourself on the tax laws of the country you reside in.
Know your personal risk profile and be comfortable with the risk of your potential investments - historically, the lower the risk, the lower the returns and vice versa.
Take interest rates and compound interest into account.
If you know of upcoming changes regarding your personal situation, such as relocation, job changes or changes in your family situation and others, consider if and how those may affect your financial situation.
Now that you have formulated one or two investment goals, begin learning about the basics of investing in our next article on interest.
This article does not constitute investment advice, nor is it an offer or invitation to purchase any digital assets.
This article is for general purposes of information only and no representation or warranty, either expressed or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of this article or opinions contained herein.
Some statements contained in this article may be of future expectations that are based on our current views and assumptions and involve uncertainties that could cause actual results, performance or events which differ from those statements.
None of the Bitpanda GmbH nor any of its affiliates, advisors or representatives shall have any liability whatsoever arising in connection with this article.
Please note that an investment in digital assets carries risks in addition to the opportunities described above.