The more you read about this topic, the more you’ll find everyone and their brother has the perfect asset allocation model including how much cash one should have on hand.
And they’re all correct too, don’t you know! Such is the nature of the internet, I suppose.
I believe that investment decisions need to make investors happy and feel good about what they are doing, in addition to being successful. Mindset is huge and if you foster a bad one, you might not stick with it and it certainly won’t be enjoyable.
Why not be happy about this whole thing?
If you leave a couple of bucks on the table, it’s not the end of the world. Certainly not if you’re happy.
Without further ado, I will present to you two different schools of thought. One that works for me and another one that I also like. Perhaps one of these will work for you or you will find a variation that works even better.
As with all articles here, hopefully you are inspired to come up with your own ideas that work for you.
School of Thought #1: Invest a Percentage of Earnings Regularly
This school teaches investors to determine a preset amount from your earnings and deposit that with every check.
For example, investors will set aside or automatically deposit 10% or some other figure into their investment account each pay period, be it a retirement account or other non-tax advantaged account. The money never gets to their pockets, so there is no temptation to spend it. Out of sight out of mind.
This can be more easily accomplished if you are employed with a consistent paycheck rather than a business owner whose income may fluctuate, but adjustments can be made to account for that.
I think this is a very solid idea. It keeps investors disciplined and rewards them with a growing investment balance. Over time, as the balance grows, it can motivate investors to take things up a notch and increase investments further, if they are so comfortable.
Additionally, it helps protect against spending too much of your pay increases as at least some of that money will go right into the investment account.
School of Thought #2: Establish a Cash Position and Off to the Races!
This is my personal favorite and what I am working toward right now. It is based around some “conventional wisdom”, as they say.
For years I have heard “conventional wisdom” say that you should always strive to keep three months of living expenses on hand in cases of emergency. Maybe your parents taught you this or you heard it somewhere else. Others may say more, others may say less.
I’ve picked a number (which I won’t share here because that number will be different for everyone). This means that I like to invest every penny I have above that threshold. This allows me to be in my maximum investable position at all times while still maintaining safety and security for my household.
Also, knowing where my bottom line is motivates me to save where reasonable and earn more as every cent above that number contributes to my invested assets and my financial independence. It then becomes exciting for me, which is very necessary to my mindset in terms of investing.
Again, you gotta feel good about it! What are your thoughts? Do you have an investing plan or are you just starting out? Let me know in the comments below!
*As always, this article is not meant to give financial advice. Past results are not a guarantee of future returns. Everyone must do their own due diligence and determine the money managing and wealth building strategies that work best for them. Information provided here is meant to provoke thoughts, not provide recommendations. This is not personal legal or investment advice and may not be appropriate for all readers. If personal advice is needed, readers should seek the services of a qualified legal, investment or tax professional.
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