The Mental Attitude That Will Make You Rich
What's the best measure of wealth? Hint: it’s not how much money you have in the bank
You can usually have a good idea whether someone is going to be rich by the time they’re about five years old.
If a kid blows all his pocket money on candies the day he gets it, and then wants to “borrow” a dollar that you know you’ll never get back, then you better pray his behavior changes before he becomes an adult.
While you can be pretty sure that the child who puts half his money in his piggy bank and only spends the rest is unlikely to be a burden on you or anyone else when he grows up. And a kid who uses his or her pocket money to buy candies to sell to his classmates at a profit could be the next Warren Buffett or Bill Gates.
You don’t have to look very far to see exactly these same behaviors in adults—and the results. And as we’ve seen in What to do When You’ve Hit the Jackpot, a windfall like winning the lottery or inheriting a fortune will certainly make you rich—but won’t guarantee that you’ll stay rich.
The behavior of those lottery-winning millionaires who went broke is at the root of the saying, “from poverty to poverty in three generations.” The founder of a fortune rises from the slums by his own bootstraps because he has the habit of wealth. His children often preserve the fortune because some of his mentality has rubbed off on them. But subsequent generations revert to the mean, and prefer spending their money to investing and preserving it.
Of course, adulthood offers far more temptations than childhood, in the form of credit cards, mortgages, personal loans, hire purchase, and all the other mechanisms banks and finance companies have devised so that you can keep up with the Joneses, live high on the hog now—and pay for it all later.
And this is the hidden tragedy of the middle class: debt.
Why do you think your letter box is stuffed with credit card offers? So the banks can charge you 18% or more. They don’t make any money to speak of from the commissions they get on transactions. Just enough so they won’t cancel your credit card if you pay your bill in full every month.
Almost their entire profit is the interest from people dumb enough to use their credit cards for short-term loans.
At 18% a year, $1,000 grows into $5,234 in ten years. No wonder banks love credit cards.
But how many credit card users stop to think that if they run up a bill of just $1,000, it could cost them, in effect, about $500 a year to pay off?
So next time you drive around one of those upper-middle class suburbs, with the BMWs and Volvos parked in the driveways, ask yourself what would happen if these people lost their jobs. Without any money to service their debts, all those expensive toys will be taken away from them.
When you’re in debt, the power of compound interest—which can multiply your money five times in ten years—is working against you. When you’re burdened with debt, coming home from work with your paycheck is like carrying a bucket full of water with a hole in the bottom: by the time you get home, a lot of the water has already drained away.
The person with the mentality of the rich has compound interest working in his favor. When he gets home with his paycheck, it’s intact. What’s more, he comes home with more than his paycheck thanks to the interest, dividends and other profits he is earning from the money he didn’t spend in the past. When his wealth has reached a certain point, losing his job won’t affect his lifestyle at all.
Spend LESS Than You Earn
Ultimately, wealth or poverty, financial security or uncertainty, is a direct result of your behavior with money. Your best index of whether you are (or will be) rich, is not how much money you have in the bank, but whether you practice what I call “the habit of wealth,” and spend less than you earn.
And the key to spending less than you earn is to always put aside a percentage of your paycheck, dividends, or other income into a “rainy day” account.
And only spend what’s left . . . making sure you still have at least a few dollars in your pocket come next payday.
But if you have any debts, you use that money to pay them down. As only then can you enter the “virtuous cycle of wealth”: as your income rises, you have more to save and invest (as well as spend)—and as your investments increase, your income rises.
And eventually, you’ll reach the point where you can wake up every morning and choose exactly what you want to do with your day.