In the previous post about penny stocks (see link below), I discussed how penny stocks (stocks trading under $2 per share) are a very risky investment instrument, and as such, intelligent investors should not invest their retirement nest-eggs in these low priced stocks.
However, if you do feel inclined to trade penny stocks for learning or the excitement (both are OK), I recommended only investing what I call “play” money in these stocks. I gave a general explanation about what “play” money is, but I didn’t have a chance to get in to the details of 1) what is it, and 2) how much play money should a person have? These two topics will be the subject of today’s post.
1. What is play money?
So first, what is the concept of play money exactly? In T. Harv Eker’s book, “The Secrets of the Millionaire Mind,” he recommended that your paycheck should be split in the following way, because it is the way millionaires do as well. Please note that this is your paycheck that you receive, after pre-tax deductions have been extracted.
If you haven’t read T. Harv’s book, pick up a cheap used copy of it at Amazon. I’ve pasted the link below if you’re interested! It’s worth the read!
- 50% of your paycheck should be kept in your checking account for monthly living expenses (food, childcare, gas, etc)
- The remaining 50 % should be split as follows: (The %’s below are % of your total take-home income)
- 10 % given to charities (My Money Blog – Donating Money)
- 10% spent for you or your family’s education (My Money Blog – Invest in Your Education)
- 10% placed in to a “financial freedom account” – This is also known as your Traditional or Roth IRA. (My Money Blog – Roth IRA vs. Traditional IRA)
- 10% should be placed in a savings account and marked as long term savings for spending. (My Money Blog – High Yield Savings Accounts)
- 10% should be used as Play money.
2. What is the correct amount of play money?
As the bullet point mentioned above, T. Harv recommends setting aside 10% of your total take-home income for play money.
For example, if your gross salary is $5,000 per month and we assume you pay 28% taxes, and contribute 15% of your income to your 401k pre-tax, this would give you a take-home pay of $3060 ($5000 – $750 to 401k = $4250 – 28% taxes = $3060 take home pay).
You would then keep 1/2 in your checking account ($1530), and allocate the remaining 1/2 according to the bullets above.
This would translate in to $306 play money (10% of your take home pay). Sounds like a good, reasonable amount right? Now, naturally, you can adjust this number down as it best suits your situation. I usually end up spending less than this each month and have money left over. If that happens, no sweat! Just transfer it to one of the other allocation categories.
Hope this post was helpful and let me know if you have any questions.
Keep on learning!
To receive updates on topics such as this one as soon as they are published, click on the link below to subscribe to My Money Blog: