One of the easiest ways to generate more money is through investing. When we invest money into assets such as stocks and bonds, we are rewarded for our contributions through dividends and interest payments. Anybody can benefit from investing! We are all capable of generating serious wealth through the crazy little thing that is, compound interest. This is something that will be discussed, in-depth, in a later post but I want to explain the process of investing in a chronological series of steps. Benefiting from investing is not time-consuming and it doesn’t require us to be millionaires – it will make us millionaires – but to begin with, we just need a small amount of cash.

We have all heard the term; “to live within our means” at some stage in our lives and yet, still so many of us are living in anticipation of our next payday – I too have been guilty of this – or worse yet, depending on credit cards to purchase things we simply cannot afford. To live within our means, simply means to spend less money than we earn – our inflow of cash should be greater than our outflow. The difference of the two (inflow and outflow) will be our investment portfolio contributions.

I know myself how difficult it is to achieve this, I’m sure everyone wishes they had money left over at the end of the month. The harsh reality is that we need to monitor our cash flow and tighten the belt today, so that we can reap the returns in the future. You see, the stock market isn’t a lottery, we aren’t very likely going to get rich overnight. Regular contributions over a long period of time, will result in serious investment returns down the line. But we first must start making those contributions.

50/30/20

A tried and tested approach to monitoring our finances is to split our wage into buckets. For this example, we will use three buckets; living costs, lifestyle expenses and savings/investing. I will start off by stating that if you have any credit card debts or similar debt then your first port of call will be to pay this off first – so the savings/investing bucket will become your debt-free bucket. A good rule of thumb is to allocate 50% of your income to living costs. Included in this will be mortgage payments/rent, food and utility bills, repairs to appliances as well as commuting costs.

Lifestyle expenses will make up a further 30% of our income. All other costs incurred in the month will fall under this category, such as: non-essential clothing, meals out, Netflix subscriptions etc. It is really up to the individual to gauge what goes where but it is mandatory that the remaining 20% of your income goes straight into your savings.

Out of sight, out of mind

It is important that you take that 20% out of sight! Wether that means in the sock drawer or in a separate savings account, you do not want to have easy access to that money as you will be too lenient on outspending your lifestyle expenses. Once you’ve gone a few months on 4/5 of your wage, you’ll soon realise it’s not really that bad. Our next step is emergency fund. I recommend 6 months salary as a good amount to aim for, this will allow you to continue living comfortably for a good while in the event of illness or losing your job and it will give you enough time to find work or set up alternative means of support. When you reach the stage where you have at least 6 months salary saved up in your emergency fund, you, my friend, are ready to start investing!