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.
My Money Blog - Penny 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.
Note: do not forget the account hierarchy order, My Money Blog - Account Hierarchy. It is not wise to allocate your money as described above if you a) do not have an emergency fund, b) do not have health insurance, c) or have a lot of high interest credit card debt. In these cases, your funds should be prioritized towards those higher priority outlets first.
As T. Harv Eker describes it, play money is money that should be set aside each month, and used for things you enjoy (sports, concerts, etc), and also things that make you feel rich. T. Harv puts a lot of emphasis on buying things that make you feel rich in order to get people to be in the millionaire mindset. Additionally, this type of "controlled splurging" can be healthy because it fulfills the human urge to spend.
What would qualify as something that makes you feel rich? Examples would include such things as buying a $100 bottle of wine or going to the nicest restaurant in town and ordering something at "market price."
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!
Jacob
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