One of the most important aspects of trading is also one of the least talked-about…
Everyone wants to talk about charts, setups, entries, and exits.
And while there’s nothing wrong with that…
You can master every technical skill of the stock market … but if you fail to master this simple practice, none of that will matter.
You’ll be doomed.
In case you’re wondering what I’m getting at … I’m talking about personal money management.
How you manage your bankroll and personal expenses can hugely affect your trading.
Are you risking an amount of capital that you’re comfortable with? Are you saving enough for taxes? Can you cover all of your everyday living expenses and still afford to trade?
These are the questions you should be asking yourself as an aspiring trader.
After all, the stock market is driven by money. If you can’t manage your money well, you won’t be able to succeed as a trader.
With that in mind, keep reading and I’ll show you how to approach personal money management for traders…
Break Down Your Budget
The first thing you should do is create a simple spreadsheet of your monthly budget.
How much do you make? How much do you spend?
The difference between the two is your expendable income, a part of which you’ll need to dedicate to trading.
Only you can decide what portion of your income (or savings) you’re willing to risk in the stock market.
If you have children (like me), there are even greater considerations. Are you positive you can support your family while trading?
Every person has a different risk tolerance. Some people love to gamble and spend, while others pinch pennies and frugally save.
Maybe you’ll have some incredible beginner’s luck … funding your trading account only once and growing it from there.
But many newbies have to fund their accounts more than once in the beginning. There’s nothing wrong with that — especially if you don’t have a large savings account to pull from.
Additionally, having a steady job while part-time trading is another option. In fact, this can be an excellent way for newbies to dip their toes into the stock market without relying on it for income.
Never Risk More Than You’re Willing to Lose
Before you make any deposit into your trading account, ask yourself … how would you feel if you lost 100% of that money?
Of course, the plan is to grow the money. And if you study hard and apply yourself, that’ll probably happen for you.
But you can’t ignore the possibility that your first few trades will go south and take your hard-earned money with them.
And in the event that this happens, you wanna make sure you’re risking expendable income.
If losing your initial small-account capital would put a serious strain on your lifestyle, then you’re trading with too much size.
This is obviously important because you need to be able to cover your basic expenses, but there’s another reason to consider this as well…
Bottom line: If the money you’re trading is absolutely essential for you to live, you won’t make the best decisions when trading it.
You’ll be too emotionally attached to that money, which could lead to terrible trading decisions ‘in the moment.’
On the other hand, if you can find the perfect account size — one that gives you slack to make decent money but doesn’t make you lose your stomach every time a dip occurs — you could potentially become an unstoppable trader.
Set Aside 25% of Profits for Taxes
Options contracts are taxed based on a 60/40 split between the long and short-term capital gains rates.
This means that 60% of the gain (or loss) is taxed at the long-term rate, while 40% is taxed at the short-term rate.
These rates depend on your taxable income and filing status.
The way options contracts are taxed can be very confusing, especially to anyone new to the options market.
But as a general rule of thumb, you should be setting aside a minimum of 25% of any profits you make for taxes.
You may end up paying a lower % owed at the end of the year, but it’s better to be safe than sorry.
Then, I recommend that anyone making money in the options market work with a professional tax consultant to determine what their liabilities are.
It’s a small price to pay to a professional that’ll help you avoid being slapped with fines or penalties later on down the road.
It may not be the most fun part of being a trader, but personal money management is vital to your success as one.
Make sure your finances are in order so that you can focus on the best setups without emotional attachment.
Break down your budget, never risk more than you’re willing to lose, and always set aside money for taxes.