In my conversation with financial planner Joshua Sheats, he explained how integrating personal and professional financing is beneficial and almost a requirement to the speed and longevity of building wealth. He also provides the best approach to truly achieving and maintaining financial freedom.
Personal vs. Professional Technical Financing Defined
Personal finance is all the stuff that you do with your money. Classic examples of personal finance advice are:
- Don’t buy a latte everyday
- Invest in real estate
- Get out of debt
- Fund your 401k
These are the “should and shouldn’t” pieces of advice that are commonly promoted in financial articles and financial shows.
The world of professional technical financial planning is more specific.
- If I am going to buy a piece of real estate, should I purchase it within a trust or a business entity?
- When investing in a retirement account, should I use a solo 401k or should I establish a defined benefit pension program?
- If I am going to buy life insurance, should I buy term life insurance, universal life insurance, or whole life insurance?
Personal vs. Professional Technical Financing – How it’s Sold?
Typically, personal finance and professional finance are sold and promoted in very different ways. Personal financial advice, especially in the realm of real estate, is usually sold through motivational seminars.
“You can get rich if you buy rental properties. With only $10,000, I can teach you how to create an empire with no money down!”
These types of seminars and forms of education are very influential. However, they promote a mentality that may land you in trouble when the going gets tough. Joshua finds those investors who avoid getting into the specifics (i.e. technical planning) will always try to solve all financial difficulties by simply buying more and more properties. For example, if an investor wants to increase their rental income to fund a vacation, instead of taking a deep dive into their budget, refinancing, etc., they will just buy another property. In other words, they take massive action with minimal details.
On the other hand, if you only focus on technical financial planning, you will lack the motivation and practice. For example, someone will worry about how to optimize the asset allocation in his or her retirement account when they should be sending out direct mailers or putting in offers. In other words, they have maximum direction with minimal action.
Therefore, the combinations of personal and technical financial planning are required to be fully successful financially in the long-term.
The Best Approach – Setting Goals
The best approach to financial planning always starts with goals. You should always build from precise, stated goals that are specific to YOU. However, often times, this isn’t the case. When Joshua asks people how much real estate they want to own, they will almost always throw out round numbers. “I want to own 10 rental houses.” “My goal is to own $10 million worth of property.” “I plan on owning 25 units.”
In response, the first question that Joshua asks is “why?” Usually, these whole numbers come from reading a motivating book. Maybe they came from a motivating speaker that talked about how rich they are and all the things that they can buy. Going back to the best financial planning approach, “are these goals specific to what you want and what you need?” If the answer is ‘no,’ then it is time to sit down and reevaluate “why” you are investing in the first place.
Real estate should simply be a funding mechanism for your life. Therefore, take the time to sit down and actually figure out how much money you need. The median household income in the US is in the $40,000 range. Depending on your market, you can hit $40,000 in net profit with 4 to 5 rental houses once they are debt free.
However, many people don’t actually take the time to sit down, look at there expenses, figure out how much money they need, and create an investment strategy to meet that goal. Instead, they wind up pursuing an inefficient or riskier plan to hit a financial number that they read in a book or heard from a motivational speaker.
The Best Approach – Create a Foundation
Joshua doesn’t think that there is anything wrong with wanting to spend more money (i.e. have more life expenses) or trying to accumulate a bigger portfolio. But, he believes and has seen that the quicker you can get to a place of financial stability and the lower your goals are, the easier it is to get there with minimal risk.
Therefore, place your $10 million goal to the side – at least for now – and do the following first:
- Determine your monthly expenses (Joshua believes that you can have a great lifestyle on $4000 a month, but ultimately, that is up to you)
- Create a plan to achieve a monthly income that covers your expenses
- Once that income level is achieved, aggressively pursue the clearing all of the leverage on the portfolio (with zero debt, no matter what the market condition, you will have total safety)
- After you’ve created a foundation, then begin pursuing your $10 million goal
Creating a solid foundation to launch yourself from will set you up for a lifetime of wealth. Then, if you choose, pursue the big fancy personal finance goal of $10 million. That way, in the pursuit of this lofty goal, if you make mistakes and lose everything, you’ll still have a solid foundation. This is much better than losing everything (like many investors did in 2008) and having to start from scratch.
Real Estate Is a Means to an End
The idea behind taking this approach is to recognize that owning real estate is not an end in and of itself. Rather, it is a means to an end. As soon as you have your foundational goals achieved, you should be working to stabilize it. It is far better to achieve a basic goal, stabilize, and move on from a place of strength, than it is to be always extending out your hand for more, more, more. Joshua believes that real estate is a fine investment class that has created many wealthy people. However, it still has it’s own problems. Without focusing on something like good financing and minimization of financing, you end up stretching to far. Then, if the market conditions change, the immature investor has to start all over again.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.