When I teach my personal finance seminar to lawyers or law students, I typically reach out ahead of time asking about topics of interest.
The most common response I get is something like, “I want to learn about investing.”
The other common response is, “I want to invest in real estate.”
I totally get it. Investing in the stock market and owning real estate are sexy topics.
Without a doubt, these are both important topics to cover in a personal finance seminar. We spend a lot of time in my course and here in the blog talking about investing and owning real estate.
Of course, the best way to generate wealth is through consistent investments over a long time horizon.
So, my students are asking the right questions when they are concerned about investing and real estate.
But, they’re skipping a few crucial steps.
The thing is, investing is actually the easy part.
The hard part is constantly generating enough money to fuel those investments.
That’s why investing and owning real estate are “Day 2 topics.” On Day 1, we have to build the foundation.
Think about it like this:
- Before we can invest, we need excess money to invest.
- To have excess money to invest, we need a budget that actually works.
- For a budget that actually works, we need clear motivations.
- Clear motivations means a strong money mindset.
Can you spot the issue of investing without a solid foundation?
When my students ask me a question about how to start investing, I tend to respond with a question of my own:
“How much savings does your budget generate each month?”
Yes, I know. It’s so annoying to answer a question with a question.
This particular question usually leads to a double dose of annoyance from my students.
My students are first annoyed that I ignored their question about investing. They didn’t come to me to talk about something boring, like budgeting.
They want to know about the exciting stuff, like earning huge returns in the stock market.
Next, after this initial annoyance fades away, another form of annoyance sets in.
My students get annoyed because they can’t actually answer the question.
They realize they have no idea how much money they’re saving each month because they don’t have a budget.
That’s a problem.
Not having a budget is a problem for anyone who wants to consistently invest.
To be a successful investor, you need to consistently fuel your investments. There will be ups and downs in the markets. That’s to be expected.
Your job is to stay in the game and keep feeding your accounts.
For example, most of us can be successful investors by simply investing in an index fund, like VTSAX.
Once we’ve selected that investment, our job is to constantly add money to your investment account.
That means having a budget that works.
If you skip this part of the process, sure, you may be savvy enough to open and initially fund the account. But, my prediction is you won’t be fueling that account regularly.
Having a budget for your personal finances is even more important when it comes to owning real estate.
Investing in real estate means running a business. Money comes in and money goes out. To be successful, you have to make sure that more money comes in than goes out.
This is obvious stuff, right?
The same logic applies to your personal budget: if you want to get ahead in life, more money needs to come in than goes out.
The problem is most people have a hard enough time managing their personal finances. How are they going to handle managing business finances?
That’s why I ask my students, “If you haven’t mastered this idea with your personal budget, are you sure you want to take on the stress and risk of an investment property?”
It’s usually around this point when my students start nodding in understanding.
Before focusing on stocks or real estate, make sure your personal finances are in order.
My goal here is not to dissuade you from investing in stocks or real estate.
We all need to invest if we want to generate wealth.
My goal is to help you avoid the mistakes that so many of us make in the early stages of our careers.
One of the biggest mistakes I see is people wanting to jump to the final steps in the process without starting from a strong foundation.
If you’ve been following along on the blog, you likely noticed the progression in topics we’ve covered. This is the same progression that we follow in my personal finance course.
You’ll see links to each one of these topics featured on the top of the Think and Talk Money homepage:
We initially covered each of those topics in order from top to bottom. First, we talked extensively about the mental side of money. Without having your money mindset in the right place, nothing else matters.
We then spent a lot of time talking about personal finance fundamentals, like budgeting, saving, and handling credit and debt responsibly.
Only after having our personal finance foundation in place did we talk about more fun concepts like investing and real estate.
There’s a reason we’ve covered these topics in this order.
If your money mindset is not in the right place, you won’t be able to stay on budget.
If you can’t stay on budget, you’ll likely fall into debt.
When you’re falling deeper and deeper into debt, it doesn’t make a lot of sense to prioritize investing.
Why bother with investing if any profits are just going to disappear?
Let’s focus on that last point for a minute.
What sense does it make to invest if you’ve never proven to yourself that you can use those investment gains responsibly?
I never want to see people take on the risks of investing just to have any profits disappear because they don’t have a strong personal finance foundation in place.
For example, imagine someone does the work to find and sustain a good rental property that generates $1,000 per month in cash flow.
It’s not easy to earn that much. It takes time and effort, not to mention the risk involved.
If that same person blows the $1,000 he earned on things he doesn’t care about, what was the point?
Why take on the risk and do the work if the money will all be gone by the end of the month?
Unfortunately, this is how many people go through life. They work hard, make good money, and then have nothing to show for it.
I don’t want that to be your fate. I want you to have a plan for your money before you earn it.
That means sticking to a budget that consistently moves you closer to living freely on your terms.
Most of us don’t know where our next dollar is going.
The reason most people never get ahead with their finances is because they don’t have a plan for where their next dollar is going.
Their income hits their checking account, they spend it on this or that, and pretty soon that money has disappeared. They haven’t used the money to advance any of their priorities.
It’s just gone.
To me, this is one of the most important money mistakes that we need to fix right away. We definitely need to fix it before we start fantasizing about big investment returns.
If not, you’ll just be making the same mistakes, just with more money to lose.
Having a plan for our money, before we earn it, is essential if we want to reach our goals. With a plan, we can eliminate the disappearing dollars with confidence that our money is being used to serve our purposes.
How do you create a plan for your money before you earn it?
You need to have a budget.
If you don’t currently have a budget that results in excess money at the end of each month, I encourage you to start there before thinking bout real estate.
When you have strong fundamentals in place, money becomes fun.
Being good with money doesn’t have to be stressful. Once you have the fundamentals in place, you’ll start to see how each dollar you earn gets you one step closer to financial freedom.
Before you think about investing in stocks or in real estate, make sure that your personal finances are in order.
Otherwise, the effort, stress, and risk of investing is not worth it. Any dollar you earn is likely to disappear as quickly as it comes in.
To prevent that from happening, establish good money habits before you buy real estate.
In the end, you’ll be so happy that you did.
For any investors out there, did you jump in before establishing strong personal money habits first?
Did any benefits you earned from investing simply disappear because you didn’t have a plan for those dollars ahead of time?
What advice do you have for beginners thinking about investing?
Let us know in the comments below.
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