{"id":159349,"date":"2023-09-30T12:00:00","date_gmt":"2023-09-30T18:00:00","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=159349"},"modified":"2024-02-29T17:51:55","modified_gmt":"2024-03-01T00:51:55","slug":"what-a-strong-financial-foundation-looks-like","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/what-a-strong-financial-foundation-looks-like","title":{"rendered":"Set Yourself Up For Success Before Investing\u2014What a Truly Strong Financial Foundation Looks Like"},"content":{"rendered":"\n

Real estate investments can help you build wealth, passive income streams, and tax savings. But that doesn\u2019t mean the average person is financially ready to be a landlord or <\/span>flip houses<\/span><\/a>. <\/span><\/p>\n\n\n\n

Between a down payment, closing costs, initial repairs, and cash reserves, buying an investment property or investing in passive real estate syndications takes tens of thousands of dollars. And that says nothing of the risk of losses or unexpected expenses. <\/span><\/p>\n\n\n\n

Before you even think about making offers or wiring funds to syndication deals, you need to put your own financial house in order. <\/span><\/p>\n\n\n\n

Pre-Investing Steps<\/span><\/h2>\n\n\n\n

So, where do you begin? What kind of financial foundation do you need before you start investing in real estate?<\/span><\/p>\n\n\n\n

Follow these pre-investing steps to position yourself to earn huge profits from real estate investment. <\/span><\/p>\n\n\n\n

1. Stabilize your income & expenses<\/span><\/h3>\n\n\n\n

If you live hand to mouth because you don\u2019t earn a stable income\u2014or don\u2019t know <\/span>how to budget<\/span><\/a>\u2014you can\u2019t possibly invest in assets that cost hundreds of thousands and come with their own unpredictable expenses. <\/span><\/p>\n\n\n\n

In a poll last year, <\/span>over a quarter of Americans (26%)<\/span><\/a> responded that they \u201cwere unable to pay at least one bill last month.\u201d Those Americans are nowhere near being ready to invest in real estate. Their first step must be to get their budget under control: to consistently earn enough to cover all living expenses each month. <\/span><\/p>\n\n\n\n

Attack the problem from both sides. Take a red marker to every expense that you don\u2019t absolutely need to survive. At the same time, look for ways to grow your income. That could mean a new full-time job, adding a side hustle, or getting the certifications, degrees, or experience needed for a career with more upward mobility. <\/span><\/p>\n\n\n\n

2. Build an emergency fund<\/span><\/h3>\n\n\n\n

Stop me if this sounds familiar: \u201cWell, sure, this month, my budget got thrown off, but that wasn\u2019t my fault. I got hit with that unexpected ____\u201d (fill in your favorite repair, health problem, work interruption, family crisis, etc.). <\/span><\/p>\n\n\n\n

Unforeseen problems <\/span>are <\/span><\/em>the norm. Last month, it was a $2,000 car repair. This month, you came out of pocket for a $1,000 medical bill. Next month, it\u2019ll be a reduction in work hours, or having to help out your hapless brother-in-law, or a meteorite landing in your living room. <\/span><\/p>\n\n\n\n

Life throws you curveballs. Stop telling yourself a fairy tale that ideal budget conditions are normal conditions. <\/span><\/p>\n\n\n\n

Start by saving up an emergency fund of $1,000 in the bank. Every spare penny needs to go into that savings account. <\/span><\/p>\n\n\n\n

Eventually, you\u2019ll want two to 12 months\u2019 living expenses set aside in your emergency fund. The amount depends on how stable your income and expenses are. Someone with an extremely secure job and steady paycheck who spends the same amount each month can get away with a few months\u2019 worth of expenses set aside. An entrepreneur with a wildly fluctuating income needs more. <\/span><\/p>\n\n\n\n

But for now, just get to $1,000. Once you hit that milestone, you can start splitting your savings into several <\/span>buckets<\/span><\/a>. <\/span><\/p>\n\n\n\n

3. Pay off unsecured debts<\/span><\/h3>\n\n\n\n

The average American has <\/span>$5,805 in credit card debt<\/span><\/a>. Woof.  <\/span><\/p>\n\n\n\n

Consider the easiest math question in the world: If you\u2019re paying 24% interest on a credit card balance, should you pay off that balance or invest your money for a 10% return? <\/span><\/p>\n\n\n\n

After reaching a $1,000 emergency fund, consider paying off all unsecured debt balances before continuing to grow your emergency fund. At the very least, put three-quarters of your savings toward paying down balances and the rest toward your emergency savings. <\/span><\/p>\n\n\n\n

Lock your credit cards in a drawer somewhere until you\u2019ve paid them off in full. You don\u2019t need a moving target on your payoff balance.<\/span><\/p>\n\n\n\n

4. Max out matching contributions<\/span><\/h3>\n\n\n\n

All right, you\u2019ve knocked out your unsecured debts and started a basic emergency fund. Are you ready to start investing?<\/span><\/p>\n\n\n\n

Yes\u2014just not necessarily in real estate. <\/span><\/p>\n\n\n\n

If your employer offers matching contributions, take them up on them. By doing this, you earn an instant 100% return on your investment, courtesy of your employer. Trust me: That\u2019s higher than you can reliably earn on any investment in the real world. Plus, you get the tax benefits of investing in a 401(k) or other workplace retirement account. <\/span><\/p>\n\n\n\n

And don\u2019t get me started on all the zeal-eyed real estate evangelicals who don\u2019t <\/span>invest in stocks<\/span><\/a> at all. You need stocks in your portfolio, so you might as well invest through a tax-advantaged account. <\/span><\/p>\n\n\n\n

5. Set long-term goals<\/span><\/h3>\n\n\n\n

When I tell people at cocktail parties that I manage a real estate investment club and write about personal finance, their first question is often, \u201cOh great\u2014what should I invest in?\u201d <\/span><\/p>\n\n\n\n

I then force a pleasant smile and respond, \u201cWell, I really have no idea because I don\u2019t know anything about your goals.\u201d <\/span><\/p>\n\n\n\n

A 24-year-old looking for maximum long-term growth should invest differently than a 54-year-old looking to stack reliable passive income streams. Someone with high anxiety and a low risk tolerance should invest differently than an investor with a strong stomach who accepts risk in exchange for higher average long-term returns. <\/span><\/p>\n\n\n\n

Start by answering a few questions:<\/span><\/p>\n\n\n\n