Everyone has certainly been told at least a hundred times that one needs to know their personal spending limits, and that is certainly true, but many people don’t understand their own investment limits and that can be a very painful thing. Why are investment limits so important? Quite simply because they directly relate to your personal finances and how much you and your family will have on hand when you most need the money.

A person who doesn’t understand their investment limits will do things such as buy stocks on margin because they believe they are so undervalued, or they may put too much money into a bank certificate of deposit and then later need that money. These kind of situations lead to a real problem, which means either closing out an investment account that you have recently setup, or taking money out of a cd early. Both of these things typically cost the investor in the form of some fairly hefty fees. No matter how great you are at managing your own investments you cannot simply assume that you will always do well and then you can use the profit for expenses occurring in the near future. Be realistic about your expectations for your investments. Investments should be viewed as a method of long-term wealth appreciation, not as a method of getting money for the next bill.

A wise investor that knows his/her limitations will carefully plan out what kind of known expenses they will have in the next few months and then leave some extra for those unexpected costs that you know will come around at some point. After doing these things then decide how much of your capital you can invest in the asset of your choice. Understanding your investment limits directly relates to knowing your personal finance limits, so think hard before making your next investment.