Finding Your Spending-Limit

Don't spend more than you can afford to lose. Sounds obvious? Well, it is. Except… not quite.

 

The difficult part is to understand exactly what your ‘can’t afford to lose’ amount of money is.

Most of us who were born in the West have many options when it comes to our personal finances. We can save or not save towards our retirement in low- or high-risk mutual funds, invest in higher education that will likely yield higher income in the future, take quick loans or use our credit cards to cover accidental over-spending; borrow from our houses/apartments that have risen in value etc. etc. We have a world of financial opportunities before us. So even if we lose some money investing, we have all kinds of financial solutions to potentially mitigate the pain of that loss.

 

Considering this, how do you determine exactly how much money is “what you can afford to lose”?

Try this. Make a rational calculation of how much money you think you can lose without damaging your overall financial goals (such as having X amount of money in retirement savings or having Y amount of monthly spending money).

Then do a thought exercise. Imagine yourself having lost all of that money and imagine how life would be after that.

Imagine yourself telling your spouse about it. How would that conversation go? Imagine making the adjustments with your bank to cover the losses. What interest rate would they be slamming you with? Imagine what things you would not be able to do if you lost the money, and how you would handle that. Would it be fewer meals out and more evenings alone cooking food?

Now, how did it feel when you did the thought exercise? Did it make you cringe thinking of that conversation with your spouse? Did it feel horrible to think about standing alone in your kitchen cooking food for lunch boxes instead of going out for drinks with your friends? If the answer to these questions is yes, then you need to lower the amount of money you estimated that you “can lose”.

On the other hand, if you went through the thought exercise feeling that it would be no biggie and that your life will go on anyway, then you’re good and your chosen amount of “can lose” is right for you.

Once you are actually investing, ask yourself again how you feel about the risks you are taking in your investment endeavors. Does it worry you when the market prices of your securities fall? If so, you need to lower your ‘can lose’ amount, or mitigate the risk in other ways. One of the first professional investors, Jesse Livermore born in 1877, famously said this about feeling uncomfortable about the amount of risk you are taking in the markets:

“Sell down to the sleeping point”

2017-08-19

Disclaimer: The information in this article, as all content on BlockBull Review, is not and should not be seen as investment advice. The information is for educational and/or entertainment purposes only, so use it at your own risk. It is possible to lose money when engaging in any investment including cryptocurrencies and past performance does not indicate future performance. Any opinions expressed are those of BlockBull Review's writers who are not broker-dealers or advisors of any kind.


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