How to Fund Your Stock Investment Program - dummies

How to Fund Your Stock Investment Program

By Paul Mladjenovic

If you’re going to invest money in stocks, the first thing you need is . . . money! Where can you get that money? The challenge comes down to how to fund your stock program.

Many investors can reallocate their investments and assets to do the trick. Reallocating simply means selling some investments or other assets and reinvesting that money into something else (such as stocks). It boils down to deciding what investment or asset you can sell or liquidate. Generally, you want to consider those investments and assets that give you a low return on your money (or no return at all).

If you have a complicated mix of investments and assets, you may want to consider reviewing your options with a financial planner. Reallocation is just part of the answer; your cash flow is the other part.

Ever wonder why there’s so much month left at the end of the money? Consider your cash flow. Your cash flow refers to what money is coming in (income) and what money is being spent (outgo). The net result is either a positive cash flow or a negative cash flow, depending on your cash management skills.

Maintaining a positive cash flow (more money coming in than going out) helps you increase your net worth. A negative cash flow ultimately depletes your wealth and wipes out your net worth if you don’t turn it around immediately.

The first step in calculating and analyzing cash flow is to do a cash flow statement. With a cash flow statement, you ask yourself three questions:

  • What money is coming in? In your cash flow statement, jot down all sources of income. Calculate income for the month and then for the year. Include everything: salary, wages, interest, dividends, and so on. Add them all up and get your grand total for income.

  • What is your outgo? Write down all the things that you spend money on. List all your expenses. If possible, categorize them as essential and nonessential. You can get an idea of all the expenses that you can reduce without affecting your lifestyle. But before you do that, make as complete a list as possible of what you spend your money on.

  • What’s left? If your income is greater than your outgo, you have money ready and available for stock investing. No matter how small the amount seems, it definitely helps. Some people have built fortunes by diligently investing as little as $25 to $50 per week or per month.

    If your outgo is greater than your income, cut down on nonessential spending and/or increase your income. If your budget is a little tight, hold off on your stock investing until your cash flow improves.

Don’t confuse a cash flow statement with an income statement (also called a profit and loss statement or an income and expense statement). A cash flow statement is simple to calculate because you can easily track what goes in and what goes out. Income statements are a little different (especially for businesses) because they take into account things that aren’t technically cash flow (such as depreciation or amortization).