creating a wealth mindset

February 19, 2018

A large part of building wealth is seeing things through a different lens than the world around you. Whether it's income, a material possession, a loan, or something else that exists in your financial life, it's important to see all of those things with a wealth mindset. With a wealth mindset income becomes a tool to purchase freedom, not a way to buy toys. A car becomes a hindrance to wealth, not a trophy piece. But to get there you need to flip your thinking to a way that is completely incongruous to what you see and hear every day. Start by following these 10 steps to create your wealth mindset.

 

Know what building wealth really is

 

A lot of personal finance advice revolves around topics like balancing checkbooks, debt consolidation and how to finance a car. Unfortunately people giving this advice rarely tie it back to the wealth building process and how it fits into a person's overall financial picture. Sadly, this is as far as most people go in their understanding of money. Wealth building is not any of these things. It' the process of putting as much of your money as possible to work so that you care less about what your employer paid you and more about how your investments performed. To achieve substantial returns on your money, you must have a lot of money invested, and to do that you must stay out of debt and eliminate unnecessary expenses. View your salary as something that can be invested, not something that can buy you things.

 

Obsess over your wealth conversion rate

 

As discussed above, to build substantial wealth you need to invest as much of your money as you can. Your wealth conversion rate is the % of your income that you're using to build wealth. While you should be investing in assets proven to provide returns much higher than inflation, such as stocks or rental real estate, WHAT you invest in is not nearly as important as HOW MUCH you invest - your wealth conversion rate. There's not a specific number, but the greater your wealth conversion rate, the more wealth you will build, and the faster you'll build it.

 

Think assets, not income

 

Our lack of financial education leads us to believe there's a direct link between income and wealth. There isn't. Some of the worst wealth builders are doctors. Foolishly we've been trained to think people who earn a lot of money have a lot of money. But a person with a big salary and a low wealth conversion rate is a person with little wealth and lots of toys. Instead of holding income in such a high regard, focus instead on assets. The purpose of income is to purchase assets, or pay down liabilities (debt). Paying down and eliminating liabilities frees up money to buy more assets. Assets grow in value and provide more income, which can then be used to buy even more assets. Repeating this process over and over is how significant wealth is built. 

 

Hate debt, and feel sorry for those that don't

 

We live in a society where going into debt is encouraged and unfortunately many people feel that debt is 'just part of life'. This is incredibly sad because it's not true and so many people don't know any better. Many people who receive a bonus, tax return or other windfall, use it as a down payment to go further into debt. To create a wealth mindset you have to go against the current tide in our society. It will fee like swimming upstream but it's worth it. Hate debt. If you don't hate it you'll spend just a little more on that car or worse yet, you'll borrow money for things like furniture and iphones. Please don't. Avoid debt for anything that's not a necessity and feel sorry for people who haven't yet seen the light.

 

Feel sympathy, not envy, for people that drive fancy cars

 

The average monthly car payment is now over $500. Ouch! It makes me cringe to think of how much time people spend at work to pay for rapidly depreciating liabilities. Yet most people feel a twinge of envy every time they see a BMW or Porsche. With a wealth mindset you'll begin to feel a little bit sorry for these people because they've taken on so much debt and are trading in so many hours of their life to pay for that car. If only they had a wealth mindset. Are there some people that are so wealthy they can buy a Porsche with cash? Yes, but very very few. Most of them are taking on huge loans, adding years to their career just to impress you and other people they don't necessarily like. Sad.

 

You trade life hours for every purchase

 

The car example leads us to one of the most important fundamental principles of the wealth mindset. For everything you purchase you're trading in hours of your life. Because you trade in life hours for a salary and then use this salary for purchases, everything you buy can be measured in life hours. I didn't create this idea, it was introduced in the book Your Money or Your Life and is something everyone should read. You'll learn that you're not paying $30,000 for that new car. You're trading in six months of your life including all the late nights, meetings, commuting and stress of those six months for it. Is it still worth it? If you buy 10 of these cars over the course of your career that's 60 months, or 5 years that you've added on to your career. Still worth it? Or is maybe the $20,000 a better choice because it will give you a couple of years of life back. Once you begin thinking of every purchase in terms of life hours, you'll quickly be on your way to a wealth mindset.

 

Understand that playing the lottery is a voluntary tax

 

I hate to be the one to tell you this, but you're not going to win the lotto. The odds are so small that we shouldn't spend any money on it. Would you buy shark attack insurance? In all seriousness, would you pay an insurance company for a policy that pays out only if you get bitten by a shark? How about lightning strike insurance? You probably wouldn't buy these, yet there's a good chance you play the lotto. This is part of our psychological flaws as humans. The thought of winning something excites us so much that we lose sight of reality and needlessly spend money. Unfortunately all we're doing is voluntarily paying the government more taxes than we need to. Isn't it kind of funny how we hate tax time and try to avoid paying more tax than we need to, but yet we play the lotto every week?

 

Wait! But what about all the people that have actually won the lottery?! Good question. Most of them go broke. Why? A lack of financial education. 

 

Read and learn, but be skeptical too

 

Crucial to creating a wealth mindset is reading, reading and reading. What I've learned from personal finance books will pay me more than my job over my lifetime. There are many classics out there from The Millionaire Next Door, to Rich Dad Poor Dad and Your Money or Your Life. They all have different messages, but by reading broadly you'll understand the basic concepts better and start to make decisions for your self on which advice to follow. Take caution that there is plenty of bad advice. Be skeptical of anyone trying to sell you something beyond the book. Is it really good advice or are they a salesman in disguise? Read enough and you'll figure out who you can trust. But part of having a wealth mindset is understanding that getting rich is a slow and steady process. Be skeptical of any recommendation that involves getting rich quickly. 

 

Bigger lifestyle means fewer options

 

The more you spend on things like a bigger house, fancier cars, etc.. requires you to earn big. And when you back yourself into the corner of needing to earn big, your options dwindle. You have no choice but to stay in your high paying stressful job. The big lifestyle prevents you from being able to move to a lower paying job that you may have more passion about, cut back on hours or do whatever else you've been wanting to do. Instead of thinking about what you can buy with your income, consider keeping your lifestyle small and your options will grow.

 

It's about freedom, not things

 

If there's one consistent attribute across successful wealth builders, it's that they're goal is freedom, not things. If your goal is to build wealth so that you can buy lots of toys, chances are you're not going to make it because you lack many of the attributes discussed above. However, if your goal is to build wealth to provide your self more life options, take your time back or simplify, you're on the right track. The whole reason for building wealth is to use it as a tool to create happiness. Successful wealth builders know toys don't buy happiness despite what the world tells us. But freedom does. The freedom to choose where to live, what job to do and how many hours to do it. 

 

While I don't agree with everything she says (for example she thinks everyone should retire at 70 - no thanks!), Suze Orman has been a pioneer in personal finance. I'll end this post with the quote she ended every show with, because I think it's very appropriate to creating a wealth mindset. Follow the 10 steps above and Suze's quote below and you'll be on your way to your wealth mindset in no time.

 

"First people, then money, then things" - Suze Orman 

 

 

 

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