Personal Finance: Your Relationship with Money

“You can afford anything, but not everything.”

Before we get into investing, we need to address the elephant in the room – your personal finances. To invest, you first need money to invest with.

Here’s a quick guide to gauge your financial fitness:

How much you earn – How much you spend = How much you can invest

If you don’t know the exact amount you spend per month, now is the time to review previous bank statements and start tracking your spending. Don’t get discouraged if the answer to the equation above is zero or negative – all is not lost. With a little dedication and cost cutting, you can trim your spending, begin saving, and start investing.

Fixed & Variable Expenses: Cost Cutting

Fixed expenses are things that don’t change from month to month, like your rent or mortgage, car payment, and cell phone payment. You may have more, and that’s okay. Just include all of them when calculating your fixed expenses.

Variable expenses are things that occur more or less at random, like happy hours, shopping, and entertainment. This is the best place to look to cut costs because variable expenses are flexible. Maybe you can cut back on the daily Starbucks or maybe get a cheaper car. Cutting back in a few areas can add up to thousands of dollars per year that you can use to invest.

If you have consumer debt, you should consider paying it off before investing. With debt, the negative consequences are compounded. By no means should you ever forego debt payments to invest in anything: real estate, stocks, bonds, anything.

Be on the same page with your partner

It’s important that you and your partner agree on how you’re going to invest. Risk is a major factor in investing, but it’s also the reason it can be so lucrative. Having a clear understanding of everyone’s goals, expectations, and risk tolerance makes the whole endeavor easier and more enjoyable.

Lifestyle Creep and YOLO

Lifestyle Creep goes like this:  You get a raise at work and your partner received an inheritance from a relative. Now you can afford that Mercedes, drop the Toyota, and add that extra room onto the house.

BOOM. All of that extra money is spent. Lifestyle creep is the tendency to upgrade your lifestyle as your income increases. Let’s say you saved that extra money, didn’t add on to the house and kept driving the Toyota. That extra money could be the down payment on your first flip.

Then there’s the “You Only Live Once” mentality. “YOLO” is often to blame for overspending on luxuries. You only get one life to live, so take advantage of every opportunity that you can, regardless of cost. Frivolity is fine when it’s kept in check but can leave you with less savings, or worse, debt.

These ideologies are the reason many people, from all income levels, are living paycheck to paycheck. Having a handle on your lifestyle is of utmost importance when investing in anything, which is why personal finance is more about psychology than just math. Control your finances. Don’t let them control you.

It’s All on You

Investing is the best way to create real wealth, and real estate is just one of many types of investments. We believe it’s the best because it’s accessible to almost everyone. You can keep your full-time job, you don’t need a real estate license, and in some cases, you can invest even if you have bad credit or no money at all.

It’s not a “get rich quick” scheme by any stretch of the imagination. Yes, it’s possible, but not probable. Having your finances under control will help you prepare for and take advantage of whatever comes your way. Now let’s explore the many reasons why real estate investing is one of the best ways to build wealth and achieve financial independence.

Patrick McGregor

Patrick McGregor

Patrick McGregor is a senior writer covering the real estate industry and overall economic trends in the United States for several Yardi product publications. He also holds an MBA from Thunderbird School of Global Management. Patrick was previously a commercial real estate analyst at Yardi Matrix for five years. His work has appeared in the New York Times, Bisnow, GlobeSt, The Real Deal, Business Insider, The Denver Post, The Motley Fool, and more.