Personal Finance II, Getting Started
- Personal Finance I, The Essential First Step To Investing
- Personal Finance II, Getting Started
- Personal Finance III – Practical Steps
Too often people skip getting their personal finances in order, and jump right into learning about investing. In the last article [Personal Finance, The Essential First Step To Investing] we discussed why it is the necessary prerequisite to investing. We saw how it shared many similarities, and also creates a solid foundation of skills, knowledge, mindset, attitude, and other qualities that are required before learning to invest. Through personal finances, the foundation that is developed will be useful across all areas of investing (RE, business, etc) and not just limited to one investment tool such as stocks.
But at times the tasks involved in managing and getting personal finances in order can seem too large and daunting. People also start getting ahead of themselves, and use the excuse that it doesn’t solve the issue of not having extra/enough money to invest with. In this article and the next one, I will discuss how to get started, as well as some ideas that relate specifically to investing (linking the two together directly). This will help new investors break down these psychological barriers to the first step (personal finance), as well as to help with motivation.
The Biggest Roadblock Is Your Mind
Getting started and continuing with the process are the hardest parts of personal finance to deal with. Psychological barriers created by the society we live in, has shaped the mindset & attitude to a point where it is difficult to change. Society today fosters consumerism, excessive spending, artificial worth/value, lack of responsibility, complacency, giving in to short term desires, impatience, and living on credit. Media also adds to the problem, by increasing our wants & desires, and placing artificial importance on things that have little real value. People don’t see anything wrong with spending in excess, or living beyond their means. Lavish lifestyles, and buying the latest gadgets to simply “look” intelligent/smarter/successful have become the norm. Living on credit and continually increasing debt loads, without worrying about the end result is socially accepted as part of everyday life. Patiently saving up for something is a thing of the past, and when people want something, they just get it with credit. Difficult tasks are met with excuses, rather than a show of effort and hard work.
That is why the first area to get started with, must be the mindset & attitude. You don’t want to lose this battle, before you even get a chance to start. You must adjust the way you think and the attitude that society has encouraged. Below is a list to go through to start making mindset & attitude adjustments:
– Prioritizing Needs vs Wants – This addresses the attitude of what people think is important. Many cannot differentiate between what they need and what they want, and treat them as the same thing. One way to easily differentiate, is to ask yourself if you need it to survive? or if you can survive with a cheaper alternative? Survival should always come first, luxury afterward. Wants, have a high emotional association with it as well. Its okay to have nice things that you want, but should it really come ahead of issues/problems such as having an inadequate emergency fund? not having enough money to retire on? cash flow issues? no savings? trouble making ends meet? In investing, you’ll have to prioritize opportunities (which will give you better returns with insignificant risks), as well as the resolution of problems (sequence of problems to be fixed in order to survive a troubled business venture or investment mistake).
– Self Control & Self Awareness – This includes controlling your impulses and consumption habits, while still being able to balance your life. You must also be aware of your emotions and wants. Then keep them in check, by not letting your wants get the best of you. The average investor’s worst enemy is themselves. Investors always need to be aware that short term gains or the potential of high returns (with significant risks) may lure you. After being aware, you need to be able to back out, and step away.
– Discipline & Patience – For many people, improvements in personal finances don’t happen overnight. Have the patience to see it through, and the discipline to stay on track long enough to allow the improvements to start taking shape. Then, continue with them. Delay gratification instead of giving in to immediate short-term rewards, or for mediocre performance results. The average person is known to make decisions based on short term satisfaction, rather than thinking about the long term impact. Waiting until you’ve gotten your personal finances in shape before investing also tests your patience. Many times an investor needs to wait for the right combination of price, situation, or finances to be in place, before executing an investment decision. Giving in to impatience and executing at the wrong time, situation, or financial situation, can be financially disastrous.
– Perceived Worth (artificial or real?) – The average person places a high importance on things that look good “bling“, over things that truly have value/quality/worth or usefulness. They are more concerned with impressing people than actually making their life easier or better. When everyone around you and the media are pushing artificial worth, it may be difficult for one to clearly see though the smoke. Questioning and evaluating perceived worth helps. Pay attention to how a particular item/service actually improves your life (and by how much). In investing you will need to evaluate the real worth of businesses, operational expenses, and investments (stocks, RE, etc). Money is made when you buy. If you cannot tell when the price is too high, or not worth acquiring, you’ll end up losing money.
– Work Ethic (No Excuses!) – Many people complain before making an attempt or putting in an honest effort into their finances. You’ve probably heard the excuse “money makes money“, or “I don’t have any money to begin with“. Neither did the best investors. In his youth, Warren Buffett first started raising capital through working. He sold bubble gum, worked a paper route, slaved away doing manual labor at his grandfather’s shop, sold refurbished golf balls, etc. “The rich get richer, and the poor gets poorer”, is another excuse not to try. How did the rich get rich? Some may have inherited it, but how did their predecessor get rich? Unless they were a descendant of royalty, most likely someone down the line was not rich. Excuses are lies you tell yourself. Most of the time it is denying that you don’t want to go through the trouble, not willing to make the time, or not willing to give anything up (even if temporarily). Before joining the masses saying “there are no expenses that can be cut“, actually do the work to find out. “It’s too hard“ and “It’s too much work” are other common excuses. But aren’t you working hard to build someone else’s pyramid?, making someone else a lot of money? Doesn’t something that will benefit you and your family directly, deserve some honest effort? Nothing comes for free, everything is earned. Earning your freedom may be worth the effort.
– Independent Thinking – Because you are going to be doing something different than the average person, you are breaking away from the herd. You will be making tough choices that the average person decides to avoid completely and ignore. Your thoughts may not align with the media and masses, and be in the minority. Going forward, you must ensure that you can think and determine for yourself, and not be swayed or confused by others. However, the more tough choices you make, the easier they become, and your decision making skills will improve. Your independence will strengthen in time. Feel good about it (encouragement), as some of them won’t be easy and takes a lot of independence and courage to follow through with. With so many average investors out there, a successful investor must not rely on others to validate their decisions. Analysts, economists, the media, fund managers, etc., will all say varying things (or they may even all be in agreement) with an appearance of validity or knowledge. But you must be rely on your own knowledge, skills, analysis, and research, as they are wrong more often than not.
– Self Improvement & Continual Learning – One of the main keys to getting your personal finances in order is self improvement & continual learning. During the process you should strive to improve your knowledge, skills, and decision making ability. As this is done, improvements to your personal finances will also be made. Self improvement also requires one to be humble and leaving your ego at the door. Maintaining the attitude that there is always something that can be improved upon, and there will always be new skills/knowledge to learn, will help ensure that your finances keep moving forward. You can think of it as training to be an investor. In investing, you’ll need to learn specialized skills and accumulate knowledge in specific areas. Many things will be new to you, particularly when choosing to use different investment vehicles.
– Procrastination & Motivation – Pick an area to work on and just get started. Don’t worry about perfecting or having everything organized right away. Details can be decided upon later. Debt, expenses, raising capital, attitude (working at it), can all seem like one giant problem. But working through the process and starting on one area first gets your brain to start thinking and figuring out the puzzles slowly. Along the way you will figure out how to make the most efficient use of your time and money. Get used to starting on a task that seems unappealing, but that you know must be done. Constantly find ways to keep yourself motivated.
Everyone starts somewhere, and usually the step of going through personal finances is where successful investors get the motivation for investing. They get it from feeling the financial squeeze, going through the daily grind, and the stress of wanting a better life. They recognize that they are doing something wrong (or not doing something efficiently) that is resulting in a situation they don’t want to be in. They realize that if they keep heading in the same direction, they will end up somewhere they do not want to be. They start thinking differently and learning of ways to improve their finances. They accumulate knowledge and skills to get out of the rat race. Keep reminding yourself that you are doing something the average person doesn’t do, and by doing so, you will end up with a different outcome (better off) than the average person. All successful people have something in common, its the way they think. Their mindset, attitude, and the way they approach life in general, is the key that allows them to achieve success. This is the reason why their character traits are vastly different than that of the average person.
Sometimes you can’t change the cards you are dealt in life, but changing how you decide to play them, can make all the difference.
In the next article, I will break things down into practical and doable tasks that will put the concepts above into practice.
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Thanks & Happy Investing!
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