More than half of the problems that people face daily are money-related. For instance, money-related problems are among the leading cause of divorce today. However, having enough money would give you financial freedom and the ability to do what you like with your time. For instance, you could spend more time with your loved ones and live comfortably and I think these are things we all could love. Now, let me share with you one money mistake that held me back from a life full of all these great things so you can steer clear of them and enjoy your own fruitful life!
It was John Maxwell who said, “life is a matter of choices and every choice you make makes you.” This is true because you are faced with situations that require you to make decisions every day and your choices will ultimately determine the outcome of your life. The choices that rich people make are not the same as that of broke people and this is one of the things that differentiate them. Poor people ask $5 questions while rich people ask $50,000 questions. In other words, poor people ask questions that have little significance to their finances while rich people think of the long-term and ask questions that are more impactful.
In life, all major decisions you make are influenced by your mindset. Remember that I said earlier that the choices you make will ultimately determine the outcome of your life. Therefore, you’re likely going to make choices that will keep you poor if you have a poverty mindset and vice versa.
Furthermore, one of the major causes of the poverty mindset is your upbringing. You’re likely going to adopt a poverty mindset if you grew up with poor parents or in a neighborhood with poor people. For example, it is common to find people who grew up in a poor home having the fear of managing money. They’d rather save their money than invest it where they can get better returns simply because they are afraid of taking risks. Rich people on the other hand know that the greater the risk, the greater the reward. Therefore, they take calculated risks and invest their money to optimize their returns.
Moreover, people with a poverty mentality often feel guilty for spending money. If you’ve ever found yourself feeling bad for buying a particular thing that you need, this could be a sign of a poverty mentality. This feeling is a result of the lack of proper financial planning and it is one of the reasons why people stay broke. People with a rich mentality create a budget and plan their finances, therefore, they don’t feel guilty spending money. In addition, people with a poverty mindset believe that money is evil. For example, their favorite quote is “money is the root of all evil.” However, this is not true as most of the evil in the world today is related to lack of money. If you have this type of mindset, you would often dissociate yourself from rich people and this could be one of the reasons why you are still broke. People with a rich mindset network with others who are more financially savvy than they are and that is one of their secrets for being successful.
Additionally, people with a poverty mindset think small. They only think of small businesses, small houses, small investments, and at the end of the day, they get small results. Because of this, their focus is usually on short-term gratification and not long-term goals. For example, someone who thinks small would focus on how to make money quickly and not how to build sustainable wealth. However, the good thing about mindsets is that they are not permanent. They are a result of several factors such as your background, experiences, and level of education. Therefore, if you expose yourself to a new environment, you could learn how to develop a rich mindset.
Now, let’s talk about the rich and how their mindset helps them make important financial decisions that keep them from being poor. According to research, the average adult makes at least 35,000 decisions every day!
Although most of these decisions are unconsciously made they are related to their mindset and every decision has its consequences, either good or bad. Right from the moment you wake up, you’re making decisions. You have to decide whether to hit the snooze button or get up and prepare for the day. This is just one out of the thousands of decisions that you have to make throughout the day along with deciding what to wear or what to eat. Rich people understand all decisions are not equal so they focus their energy on the important ones, including those related to their finances.
For example, they know that the decision on what to wear is not as important as where to invest their money. That’s why you see billionaires like Bill Gates or Mark Zuckerberg wearing the same simple outfit every day.
So, let’s take a look at some of the important financial decisions that rich people make to get ahead in their business. Firstly, the rich plan their finances by having a budget that allows them to save, invest, and spend money on their highest priority items. They understand that human needs are insatiable so they create a budget that helps them focus on their needs and still have some money at the end of the day. Moreover, they start saving early for retirement because they know that the earlier they start, the better. They either contribute to their employers sponsored 401k account or open an Individual Retirement Savings account or IRA. Additionally, the rich decide the type of house to buy relative to their level of income so that they don’t end up buying a home they cannot afford.
On the other hand, the poor also make financial decisions but they often focus on the ones that are not important. That is, they try to cut out little expenses while leaving out important ones. Like I said earlier, poor people ask $5 questions while rich people ask $50,000 questions. Poor people focus on where to save a few dollars while rich people ask questions that would save them a lot of money. For you to have a better understanding, I’ll give some practical examples of how the poor and rich make financial decisions.
First, let’s start with an example of how some poor people aim to get ahead by cutting out small expenses. But before we get into the details, it is important to know that there is a limit to how much you can cut your expenses and it’s difficult to build wealth only by saving. One of the first ways poor people save money is through coupons and discounts. It’s a great deal if you can buy an item you need for half the price but are coupons always worth it? The answer depends on how you use it and how much you’re truly able to save.
Coupons and discounts are good when you’re purchasing an item you need and use regularly. However, you could also spend more money than necessary because of coupons. For instance, some coupons require that you spend a certain amount before you can redeem them. If you have a coupon for $20 off your purchase of $100 or more, you may be tempted to spend money on things that you don’t need just because you want to claim the reward. In that case, you’re no longer saving money but overspending because of coupons.
Another instance is when you make impulsive buying because you have a certain percentage discount on your total purchase. You may want to take advantage and end up buying more items just because you think coupons are free money. Sometimes, shop owners may increase their original prices to make you think that you’re saving money or simply to lure you to buy more items than you need. Therefore, before you consider using coupons and discounts, ask yourself if you would include the item on your buying list in the first place. According to statistics, you could save as much as $30 weekly and over $1,000 in a year using coupons. However, remember that you are only saving money when you’re using coupons and discounts to buy the things that you need.
Another way poor people try to save money is by buying used items or spending time minimizing their grocery costs this effort doesn’t always pay off. For example, if you have to compromise healthy eating habits because you’re trying to save money, you may end up spending more on medical emergencies down the road. Chances are, you are only saving an immaterial amount of money by optimizing your grocery costs but medical expenses can be worth hundreds of thousands. Also, some poor people try to cut costs by negotiating their monthly expenses such as their utilities and phone bills. These are another way to cut costs for sure but they may not yield the type of savings you would have anticipated.
In another instance, poor people may try to get ahead by cutting minor expenses like coffee. You might be able to save about $2 for every cup of coffee you make at home and depending on how frequently you buy coffee, you could be saving at least $1,000 every year. While there are financial experts that support these ideas, some of them think that is not the best way to save money. For instance, self-made millionaire and bestselling author, Ramit Sethi believes that you can’t become wealthy only by cutting your expenses. According to him:
There’s a limit to how much you can cut but there’s no limit to how much you can earn.
That’s why we are going to take a look at how the rich get ahead by focusing on earning more money rather than cutting spending.
One of the ways that the rich earn more money is by assessing how much they could make from the degree they take. Rich people know that although having a degree could increase their potential earning, the type of degree is also important. For instance, people with a degree in the medical field, law, engineering, and computer science could be earning as much as $100,000 annually. Rich people always think of the long-term consequences of their short-term decisions.
Next, rich people assess the management fees of their investments. Some investment companies charge investors to manage their investment portfolio and these fees can eat into the returns, especially when many of these costs can be avoided. For example, an expense ratio greater than 1.5% means that you would pay about $15 for every $1,000 you invest. Also, if your annual return from an investment is 5% and the charges are about 2%, you are losing about 40% of your interest annually.
Finally, rich people cut down major expenses instead of focusing on smaller ones to make the most amount of financial progress. For instance, housing costs can be as high as 30% or more and likely it’s one of your major expenses. Rich people cut down housing expenses by buying a home they can afford or by splitting the bills with someone else. Also, they invest in rental properties and that serves as an extra source of income. Other major expenses that the rich focus on include their transportation and entertainment and by cutting down these categories alone they are able to see very noticeable savings.
Therefore, avoid the mistake of focusing too much on the small financial items in your life and nail down the heavy hitters and if you do I can promise your financial life will change for the better!