The single most important step to getting your finances under control is to make an accurate budget and stick to it.

Know Yourself

There is no one investment solution that fits all. It is important to understand yourself and your goals, and that you have a plan to reach those goals. First you need to identify your financial goals, then you need to figure out how to get there and find out what is realistic.

Why do I want to invest?

"To make money" is not actually an answer, you need to break it down, is it for retirement? A new car? Education? Perhaps there is a combination of reasons. You need to list them all as each goal requires a slightly different plan.

How Much to Invest?

This question completely depends on your current financial situation and will likely change over time. The idea is to find a minimum you can afford now and set up a regular payment plan. Paying yourself first is not a new concept, but it is one we often ignore. There are things in life you always have money for, the necessities. Those are the bills you pay first every month. If you are serious about saving and investing, you need to prioritize your investments the same way. Financial success starts with a budget. Once you know how much you can afford, have a pre-authorized plan that debits your chosen amount monthly, you can always adjust it up or down later.

How much risk can I handle?

There are many factors that you need to look at here. The most important being the time frame of when you will need the money. A general rule of thumb, the sooner you will need the money, the more cautious you need to be. Higher earning investment tend to have more risk involved so you need to balance risk vs the element of time.

Next would be your personal circumstances. How old are you? How many dependents do you have? Again tiem comes into the picture, as you get older, the less risk you may want to assume. Also if you have dependents you need to balance the risk versus reward.

There is a mental element as well, some people are mroe prone to risk, they go sky diving, drive fast and live life on the edge. This people are less liable to lose sleep if their portfolio drops by 10%. More conservative personality types need to match their portfolio with their comfort levels. How much volatility can you handle?

Examples

The examples below are simply designed to help illustrate the comments above and are not fixed in stone, everyones situation is different and should be treated as such.

Example #1 - You want to buy a used car for $5000 cash.

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So for the sake of this example we will say this is your only goal and all your other financial needs are met. If you needed to plan for retirement as well (for example) we would split your savings and allocate part to retirement and part to the car

The first step is to identify how much you can save monthly. Once you have figured out how much you can come up with monthly, you can figure out how long it will take to save. Lets say you can afford $250/month. That means without investing the money it would take 20 months to save enough to buy the car. This is a short term goal, for such short term goals it is important to stick to safe investments like GICs, bonds or money market funds which we will look at in more detail in the next section.

Example #2 - You have two children and want to save for their education.

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The age of the children here will be the key deciding factor. If they are newborns versus teenagers will change your time frame tremendously.

Example #3 - Retirement planning

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The first step is to figure out how much you will need to retire, then calculate how much you need to save to make it happen.

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