I have said that I want to help traders. I want to back up what I am saying by not just talking about trading but about you as a person. Last week we talked about must haves before trading and the first one was trading with money that is set aside and not money you need to live on. If you don’t get that part right you can’t get the rest right. I know from experience so please listen to someone that has gone down that road. Today I want to help you because I have brought in Ed Burns a financial counseling expert to answer a very important question.
Please give Ed a warm welcome and take this opportunity to get some of your financial questions answered. Ask Ed anything at all about financial matters and he will be available for questions.
Guest Post by Ed Burns:
Question: How do I prepare my personal finances before I begin trading?
Ed: Great question! As with trading, personal finances are all about having the right information and a plan to execute and prosper. My three-step process for a sound financial plan uses the acronym D.I.E., which is very ironic, because that is exactly what might happen to your trading career if these rules are not in place before the trading begins.
I will address each individual letter of D.I.E. by order of importance. Let’s begin with “E.” “E” stands for Emergency Fund. I recommend a $1000 emergency fund be in place to cover any emergencies that might arise. Let’s face it, life happens. The hot water tank breaks or the car needs a new alternator. We’ve all been there. What we want to do is have money in place so we don’t turn to credit cards in our time of need. I recommend keeping this emergency fund in a money market account so you can get to it, but can’t get to it too easy. Remember, this is for emergencies only, it’s not an investment. You and your spouse (if married) should sit down and determine what constitutes an emergency before taking this money out.
Speaking of credit cards, “D” stands for eliminating Debt. In Proverbs it says “the borrower is slave to the lender.” How very true! Before the trade you should eliminate as much consumer debt as possible. I recommend making a list of everyone you owe money to, in order of smallest amount owed to largest; include everything but your mortgage. Begin with your smallest debt and start adding any additional money you can to this payment, while paying the minimum amounts on all the other debts. By doing this, you can begin to make an immediate impact on your debt by having small victories quickly. Once the smaller debts are paid off, use that additional money you’ve just freed up to pay more on the next debt on your list. Work your way down the entire list until everything is paid off. After paying off all of your consumer debt, I recommend taking this newly freed up money and increase your emergency fund to 3 to 6 month’s worth of living expenses.
We finish with “I.” “I” stands for Insurance. You must have the correct amount of insurance on yourself and your family before beginning to trade. Insurance is simply replacing your income and providing for your family, should you die. The recommendation is 10X your annual salary. If you make 50K per year, then you should have a $500K policy. I recommend a TERM policy. Avoid whole life or universal policies, they usually cost you more in the long-run, with no added benefit to you or your family. Listen, this is insurance, not an investment. I’m also including within this heading of Insurance, making sure you have a Will. It is absolutely necessary to make sure you have a Will. The last thing you want is for the government to distribute your assets, and that is exactly what will happen if you die without a Will.
There you have it, my three-step process for a sound personal financial plan. As I stated previously, you would never consider trading without a plan, so why not take this same strategy and use it to win with your personal finances. If you take my advice and make sure your financial house is in order before the trade, you will likely get the support of your spouse, be prepared for financial emergencies at home, and be able to give your full attention to your trading strategies.
Ed Burns is the owner of The Provision Group, a company providing financial and career coaching services. http://www.TheProvisionGroup.net Ed is the author the interview preparation book titled Why won’t they hire me?
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