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What Is 5% Money Management?
Money is involved is everything and no one can escape it. In big cities, sometimes, people has to pay to use public toilets. Today money is as essential as the oxygen. It is almost impossible to live without money. Nevertheless, many do not bother to learn about money management.
Commonly, smart wealthy people often teach their children at the early stage to understand the basics of money management. One of those basics of money management is the 5% money management rule.
What Is 5% Money Management?
When one asks a professional financial market trader the same question, he or she will tell you that it consists of using only 5% of the trading account at any time. So a professional financial market trader that has 1000000 dollars trading account will only use 5% or 50000 dollars. It means if he or she opens ten trades or 100 trades, those trades should never exceed 5% of the trading fund. Whatever happens in the financial markets, his loss is cap to 5% of the remaining trading fund. It is smart but also a simple way to control risks.
At this point, many will say, they do not have enough money to even think of learning how to manage it. However, one of the reasons why many do not attract big sum of money is because they can not control or manage money. To attract large sum of money, one must first learn how to manage, control or handle little or immense amount of money.
How much money are you willing to manage? What big sum of money are you willing to control? How big should be the amount of money that you would not mind handling? What is money management? Give examples of someone handling money. Who can control money?
I hope those questions will help you to understand why it is essential to start learning to manage money.
Another Way People Use 5% Money Management
Suppose, one is worth 5 millions dollars and one wants to start a business or engage in any investment that involves risk. One will only use 5% or 250000 dollars max. So if the business fails or anything undesirable happens, one will only lose five percent. Similarly, if one wants to start five enterprises or investments, the total amount altogether that one will be exposing to risk in all those ventures is 5%.
It is amazing that in primary schools, the basics of money management are not taught or even mentioned near kids. One will think that because money is an essential tool in everything one will do in life, this would be the first thing one should understand.
Throughout the history mankind, families, communities and even nations have wasted their future generations wealth and put a whole nation into colossal debt just because people do not adhere to the basics of money management.
Remember the last time someone says to you: "I lost everything. We put everything into that business and it is all gone"
The Golden Rule Of 5% Money Management
Never, never invest more than five percent of your total financial worth. Or never risk in anything or anyway 95 % of your wealth at anytime. If one loses the first 5% and one wants to try another business one will use again 5% of the remaining wealth. Just remember that it is 5% of the total worth at any one time. This is not per business but all businesses or investments combined.
There Is Another Way Smart Investors Use 5% Money Management
It is the money management strategy that is often used by conservative investors who hate losses. It is very simple and anyone can understand it. When one buys five stocks in the financial markets, and one stock gains 5% in value; one can secure that gain or bank it right away by selling the stock. So at any time, one of those five stocks gains 5%, one can sell it or secure the 5% gain even if one expect more gains.
I hope, you have learnt a bit about the 5% money management and will begin to apply it in all your financial dealings. As always, I like to share tips and tricks that are helpful. I hope this has be helpful to you.
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Whatever you do, remember to apply the 5% money management.