Wealth is a mindset. In my years as a financial advisor I’ve worked with many wealthy individuals who have everyday-type jobs. From bus drivers to teachers, entrepreneurs to an administrative assistant at the Chamber of Commerce, I’ve learned that income is not the best determinate of future wealth. Instead it’s a mindset, one I like to call the prosperity mindset.
A prosperity mindset takes a look at the whole equation: your daily spending, saving for your future, and yes, even how much you make. But more importantly it focuses on what you choose to do with your money, not necessarily your ability to acquire more of it.
There are three ideologies wrapped up in a prosperity mindset. First is a long-term approach. I’ve written at length in past articles about market wiggles and the stress they cause new and seasoned investors alike. The best way to overcome the day-to-day fear mongering is to take a long approach. Building wealth doesn’t happen overnight. Force it, and you risk wrecking a portfolio.
Second, avoid emotional decisions. Before making any decisions big or small, I like to take a second and check in with myself. What’s going on today? Is the decision I’m about to make a good one? Are there things going on right now that could color my decision-making ability? Is this a good time to choose this? These questions help me to understand whether emotion or logic is driving my decision.
If the decision is one of sound mind and logic, the third item I ask is if it is an informed choice. Have I thought through this option? In finance, this might translate to diversification, portfolio allocation, and risk exposure. If I’m uncomfortable, have I consulted other experts to gather theirthoughts?
Together, these mental exercises help drive a prosperity mindset. So let’s look at how they apply to finance specifically.
Above I mentioned that income isn’t a great way to determine if someone will be wealthy. Think about it like this: if I make $50,000 and spend $40,000, I have $10,000 left over to save.
If I make $1 million, and spend $1.2 million, I’m $200,000 in the hole.
The person who saves $10,000 is far wealthier than the high earner. Therefore, what you choose to do with your money is far more important than how much of it you make. It’s a mental hurdle, and not without it’s caveats. But a disposition to spending less than you make is a vital tenant of a prosperity mindset.
Now take that savings amount and apply a long-term approach. Consider an example of two workers, Ellen Early and Larry Later who happen to be the same age. Ellen starts saving $2,000 per year at age 25 and stops at 35, which equates to total savings over ten years of $20,000. Her friend Larry starts saving $2,000 per year from age 35 to 65, saving three times as much, a total of $60,000 saved. Assume they earn the same rate of return of 8 percent per year. At 65 Ellen has $291,546, and Larry has $256,566. The lesson: start early and save consistently throughout your career.
A long-term approach, avoiding emotional decisions, and making informed choices are essential to not only spending and saving, but working toward a reasonable rate of return over an extended time period. And with the transition from pensions to 401(k) and other personal saving methods, this is increasingly important.
The cost of pensions has become too large of a burden for businesses, and frankly they want to transfer that responsibility to employees – thus self-sufficiency. As a result you need to prepare, plan, and save. No one will do this for you. The good news is little changes in your behavior can go a long way. Start saving at 25? That can make a big difference. Wait to retire for a few more years? That can help. Willing to work part-time at a job you love in retirement? That can replace thousands in needed income. But the best way is to start saving now, and foster a prosperity mindset.
Think about your finances in seven or eight goals. These could be things like saving 15% of your income or “making work a choice” at 62 instead of 65. Describe the best and worst outcomes for each of those goals. Think about what you can do to start making progress toward those goals, and what is within your power to control. The market will wiggle, but it can’t change the choices you make for yourself. These you have complete control over.
If you want the ability to make choices about what you do with your time, your interests, and your relationships, start now. The real reason for saving and accumulating wealth is freedom. And freedom, like prosperity, is a mindset.
Hypothetical examples are not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
After almost 45 years as a financial advisor, one realizes that there’s truth behind the phrase, “Reality is made up of circles, but we see straight lines.” Market cycles, crises, and investor behavior are all echoes of things we’ve seen in the past and will likely experience again in the future. No doubt the COVID-19 crisis impacts us all, and while it may feel like something completely new, it really isn’t.