The other day I was talking to some lawyers I know at court while waiting for the judge to come out.
Per usual, we started chatting.
What are Da Bears going to do in the offseason?
Is the weather ever going to get above freezing?
Any good trips coming up?
That kind of thing.
During our conversation, a couple of the lawyers shared that they were enjoying my posts and weekly emails. Always nice to hear.
After a few minutes, the conversation evolved into a discussion about how the markets were doing. One of the lawyers mentioned a new stock he was looking at after watching a segment on CNBC.
As the nearest (only?) personal finance professor standing around, they asked me for my opinion.
I don’t know if they liked my answer.
Let me explain.
At the beginning of my personal finance course, I always ask my students what they want to learn about.
This conversation in court reminded me of a common theme I’ve noticed about teaching personal finance.
At the beginning of my course, I always ask my students what they want to learn about.
The most common response is something like, “I want to learn how to invest.”
OK, not a bad goal.
Investing is a crucial component of financial wellness.
However, learning to invest is not where our personal financial journeys begin.
Here’s how the scene usually plays out in my class:
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 investing in the stock market.
What I’ve noticed is that 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.
Do you see the problem?
What’s the point in learning how to invest… if you don’t actually have any money leftover in your budget to invest?
This is what I tried to explain to the lawyers standing around in court the other day.
They nodded along politely, but they really just wanted to know my thoughts on the hot stock tip.
Instead of worrying about stock tips, make sure your personal finances are in order.
My goal here is not to dissuade you from investing in the stock market.
I am a big proponent of investing. Every lawyer should be investing to create optionality in life.
My goal is to help you establish a strong foundation so you don’t fall backwards as soon as you start seeing investment gains.
One of the biggest personal finance mistakes I see is people trying to rush the process without starting from a strong foundation.
Personal finance is all about the progression:
In the Think and Talk Money blog, we initially covered each of those topics in order from top to bottom. There was a method behind the madness.
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 in the stock market and owning real estate.
Of course, 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.
At that point, hot stock tips are totally worthless to you.
Why bother with stock tips if any investment gains are just going to disappear?
Let’s focus on that last point for a minute.
What sense does it make to invest in the latest hot stock if you’ve never proven to yourself that you can use those investment gains responsibly?
Sure, you may get a quick emotional high from being right about a stock.
But, why take that risk just to have any gains disappear because you don’t have a strong personal finance foundation in place?
Imagine you happen to get lucky enough to buy and sell a stock at just the right time to make $20,000 in just a few months.
It’s not easy to earn that much. It takes some good luck, not to mention the risk involved.
Now, if you blow the $20,000 you earned on things you don’t even care about, what was the point?
Why take on the risk and do the work if the money will all be gone just as quickly as you received it?
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 the fundamentals that consistently move 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 put our money at risk in the markets.
If not, you’re likely to make 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 and have the 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 embracing the latest stock tip.
How to create a Budget After Thinking.
The key to budgeting is to eliminate disappearing dollars by creating a plan for Now Money, Life Money, and Later Money.
Your Later Money is the whole key. That’s what you’ll eventually use to accelerate your journey to financial freedom by investing in stocks or buying real estate.
1. Now Money
Now Money is what you need to pay for basic life expenses.
These expenses include housing, transportation, groceries, utilities (like internet and electricity), household goods (like toilet paper), and insurance.
These are expenses that you can’t avoid and should be relatively fixed each month.
2. Life Money
Life Money is what you are going to spend every month on things and experiences in life that you love.
This bucket includes dining out, concerts, vacations, subscriptions, gifts, and anything else that brings you joy.
We can’t be afraid to spend this money. This bucket is usually what makes life fun and exciting. The key is to think and talk so you are spending this money consistently on things that matter to you.
3. Later Money
Later Money is what you are saving, investing, or using to pay off debt.
This bucket includes long term goals, such as retirement plan contributions (like a 401k or Roth IRA), college savings for your kids (like a 529 plan), emergency savings and paying off student loan or credit card debt.
This bucket also includes any shorter term goals, like saving for a wedding or a downpayment for a house.
Most fun of all, this bucket includes any investments you make to more quickly grow your wealth, like investing in real estate or the stock market.
Later Money is the key category that fuels your ultimate life goals, like financial independence. The more you fuel this category, the faster you can reach your goals.
Why a Budget After Thinking works for lawyers when other budgeting systems fail.
It’s not for me or anyone else to tell you what to do with your money. That’s why I don’t tell you to save 20% of your income or only spend 50% on fixed expenses.
In my experience teaching personal finance, that advice just doesn’t work, especially not for young lawyers with entry-level salaries and massive student loan debt.
The truth is fixed spending rules sound good until you actually try to implement them.
In reality, when you base your entire budgeting strategy on arbitrary rules like “save 20%,” you’re likely to realize that target is out of reach.
You would have to cut so much from other areas that your budget would be oppressively restrictive. The result is you’ll get frustrated and quit your budget.
I have a different approach. One that actually works for lawyers.
With a Budget After Thinking, the central purpose is to evaluate your current spending habits, no matter your starting point. Once you understand where your money is going, you can implement thoughtful adjustments that match your lifestyle and financial goals.
No hard and fast rules.
Just individual thought and discretion with a focus on creating real money to invest.
When you have strong fundamentals in place, investing 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.
That’s when investing is fun. Whether the markets go up or down, you stick to the plan. You consistently feed your accounts knowing that over the long run, you’ll be in great shape.
So, before you embrace the next hot stock tip from the lawyers standing around the courthouse, make sure that your personal finances are in order.
When investment gains come in, you want to make sure they don’t go right out.
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 first.
In the end, you’ll be so happy that you did.
Let me know what you think by dropping a comment below.