Wednesday, May 7, 2014

The Millionaire Mindset

The Millionaire Mindset

I want to get this idea out there now: your mindset is far more important than your income level. Many people think a large income leads to financial security...and they're dead wrong. I'll show you why. 

But first, a disclaimer: as with everything, there's a limit to this idea. If you make $15,000 a year, you're not likely to get very far in saving, because one major issue (car repairs, a stay in the hospital, etc.) can wipe out whatever you've managed to save. Having worked for years in fast food, I'm well aware of this simple fact. That's why I posted a handy guide to bargain-shopping here. But, of course, don't forget that saving money ultimately depends on not getting suckered in by a sale on something you don't need. 

Bearing this in mind, I still say that your mindset matters far more than your income. That's why it's important to adopt the Millionaire Mindset! [That's already the title of a couple books, neither of which I've read yet. I figured "The Millionaire Mindset" was too clever not to have been used before, so I Googled it, and I found two different books with a similar title!] Anyway, here are the details: 

The case study

To make my point, here's a famous case study: ever heard of a song called "U Can't Touch This" by MC Hammer? MC Hammer earned more money in one year than most people do in a lifetime: he reportedly earned $33 million in 1991! Though 1991 was his peak earning year, he made many millions in other years as well. Yet he filed for bankruptcy in 1996, 5 years after that peak. How do you blow that much money?!

Well, spending $30 million on a house is one way to do it. Dozens of cars, some airplanes, and a record company were other major expenditures. His entourage supposedly took up half a million dollars per month in the early 1990s! Hammer ended up almost $14 million in debt, forcing him to file for bankruptcy (my source is, if you're interested).

The lesson

As Hammer himself has acknowledged, his priorities were out of order. According to Wikipedia (a reliable source if I've ever seen one!), he said that "money is nothing if it doesn't bring peace and if priorities are wrong"--a gem of wisdom that he unfortunately had to come by the hard way. Fortunately, now YOU don't have to.

Of course, money doesn't bring peace. It doesn't bring anything. Money is simply a tool, a creation of humans every bit as much as a screwdriver. Like the screwdriver, money can be used for good or for ill. But ultimately, a tool is still an inanimate object. 

What happens reflects the user more than the tool itself, a point alluded to by the apostle Paul in the famous (and often misunderstood) quote from 1 Timothy 6:10, which reads "For the love of money is a root of all kinds of evil. Some people, eager for money, have wandered from the faith and pierced themselves with many griefs." Note the wording here: money isn't the root of evil, the love of money is. 

The problem

Unfortunately, MC Hammer isn't the only star to mismanage his finances. Numerous others have suffered similar embarrassing bankruptcies, notably actors Gary Busey and Nicolas Cage, boxer Mike Tyson, country singer Willie Nelson, and star NFL linebacker Lawrence Taylor. In fact, there's a post on that very topic on the excellent Get Rich Slowly blog: (I discovered this, and updated this post accordingly, on 8/15/2014). These are all people who have made many millions of dollars, far more than I expect to earn in my lifetime. After all, if income is so important, why did they all declare bankruptcy?

Answer: they outspent their income. That's something that anyone can do, from a student like me to a multimillionaire athlete, singer, or actor. That's why I say that mindset is so much more important than income.

You can earn $10 million a year but if you recklessly spend money on 3 houses, 17 cars, clubbing every night, and buying the most expensive clothes you can find--you're spending more than you earn, and you'll go broke. And this fancy lifestyle won't even make you happier! (See link in the comments below for a list of 10 child stars who ended up in legal trouble--how happy do you think fame and money made them?)

If you don't understand the basic idea that nothing is permanent--wealth included--you're on the fast track to ruin. Of course, a handful of cherry-picked examples can't prove anything. I'm merely using them to illustrate a greater point about why even a vast income doesn't guarantee financial security.

The solution

On the flip side of this, there are lots of people out there like my parents, who spend far LESS than their annual income. My parents have relied on a single income for the past 25 years (and not a generous one, at that--warehouse work won't get you rich anytime soon), but they have thrived nonetheless!

How? By cutting costs wherever possible! It's a grand irony: people like my parents, though they have a modest income, have more financial security than star athletes, actors, and musicians like the ones I mentioned above. They have managed this by learning to live within their means--the ONLY strategy that will get your financial house in order.

They meticulously minimize their costs, ruthlessly cutting out anything that isn't required. They keep the house at 60 degrees in the winter (wearing sweatshirts and blankets to stay warm) and 78 in the summer. Likewise, my mom enjoys matching coupons to sales at local grocery stores, and she also frequents Amelia's, a local grocery outlet. They watch a 19" TV that's about as old as I am, and they drive used cars--even though they could spend more without missing it!

The purpose here is to minimize the cost of necessities, so that every dollar my dad earns from his job goes further. For hints on some simple (and less extreme) ways to save, check out my post here

If it seems like this would take a while to yield results, you're right: it does. Millionaires understand that persistence is the key to sustained success. Overnight sensations (like MC Hammer or other popular artists whose hard work is finally rewarded with a rich contract) often end up losing everything, because the sudden financial success hasn't taught them how to take care of their finances. So, patience is the order of the day. 

My personal testimony

My parents have passed on this same approach to me, and I hope to pass it on to you. I don't keep my apartment at 60 degrees in the winter, but then again, my utilities are included in my rent--one reason I chose my current apartment. Using the same idea of cutting out unnecessary costs, however, I live on less than $500 per month! My only expenditures are for rent, groceries, and my cell phone bill, and a couple dollars (literally, less than $5) on the occasional night out. Since I'm in a small university town, I walk everywhere, and I use the gym and Internet at my school.

No car payments, gas, or car insurance. No monthly Internet bill. No gym fees. And certainly, definitely, absolutely no struggles with cable companies! [I've come to the only-partially-tongue-in-cheek conclusion that cable companies exist for the sole purpose of taking your money while giving you headaches!] Using this cost-minimization strategy, I can live on less than $7000 per year, and save money--even though my pay as a grad student puts me below the federal poverty line!

I'm obviously not expecting everyone to live on less than $10,000 per year like me, because every situation is different. Some people have to care for family members. Some live in a rural area and can't walk anywhere; some live in an expensive city with sky-high rent. People in these situations don't enjoy all the same benefits that I do, but they should still look for ways to minimize expenses wherever possible. College students, especially, may find this resource or this resource helpful.

Throughout my years in college, I worked three jobs (10-15 hours per week, along with a typical 15-credit courseload), two jobs during summers (usually over 40 hours per week), and three jobs during a 'gap year' between college and graduate school. During this gap year, I don't recall ever logging less than 48 hours per week (believe me, I counted!), with a three-week span where I spent over 65 hours on the clock each week, not counting travel time or time when I wasn't paid for breaks! I'm sure you can imagine how glad I was to be admitted to graduate school, where I set my own schedule and work (equally hard) on a subject I'm passionate about!

I was fortunate to have parents who supported and encouraged this lunacy, pushing me to apply for jobs, agreeing to house and feed me for a small sum, and driving me to and from work when I needed it. But this lunacy was worth it, because I now have savings and no debt, despite putting $60,000 of my own money toward my degree!

My education was enough of a priority that I saved over 99% of everything I ever earned, and had to forgo spending money on just about anything else (except an $8 NFL preview magazine I indulged in every summer). Despite how tired I often felt, I had a strong enough work ethic that I was offered promotions by all three of the jobs that I held during my gap year, and I was frequently scheduled for as many hours as I made myself available.

Since I'm very aware of how much I had to work, especially at jobs I didn't like, I still stop to consider how much I want something before I buy it. And consequently, I don't fall for the marketing hype that a certain product or lifestyle will make me 'cool' or attractive. There are people who are very good at what they do, and get paid lots of money, to convince you that their product is what you 'need' to make you look 'cool.' 

But stop and think for a second: how cool is it to spend most most of your life waiting to retire from a job you hate, just to pay for things other people tell you that you want?

"How cool is it to spend most of your life waiting to retire from a job you hate
just to pay for things other people tell you that you want?"

How does your financial equation add up?

Everyone can benefit from a good, hard look at their monthly bills. Are you having trouble meeting your expenses? If so, do you pay for cable? Get rid of it--it's an unnecessary expense that encourages you not to do something more productive. Do you have a monthly cell phone bill near (or over) $100? The moment your plan runs out, replace it with a monthly, pay-as-you-go plan. There is an ever-wider variety of contract-free phones, including iPhones, whose monthly bill is less than half of what most contracts charge.

A look at the other half of your financial equation may do you some good as well. Do you find yourself bored, or constantly wishing you had more money on shopping trips? Kill two birds with one stone: find a second, part-time job to work on evenings or weekends.

This approach has the twofold advantage of supplying additional income, and decreasing the amount of time available to spend on frivolous shopping. However, it can be stressful, and will test your willpower--and even your patience! In the end, the commitment to your finances will pay off when you see the extra thousands of dollars in your bank account.

I've met several adults in their 40s, with full-time jobs, who worked the same part-time jobs that I did while on breaks. They needed more money, so they found a job to earn more money! As they, and I, will tell you, it's not beneath your dignity to work multiple jobs. It shows maturity, wisdom, and drive.

The Millionaire Mindset

The Millionaire Mindset is not the arrogance of some rich people. It's not the idea that certain work is beneath you, or that working multiple jobs is beneath you. It's not even working hard toward the goal of buying some ostentatious symbol of wealth, like a mansion or a Lamborghini.

What is the Millionaire Mindset? Living on less than your income.

The Millionaire Mindset is the idea that I need to maximize my income and minimize my expenses, even--especially!--when I can afford to spend more. If you want sustainable financial success, you have to know how much you're making (excluding bonuses, tax breaks, or other unreliable sources), and you have to spend significantly less than that!

It won't make you rich right away, but it will change the way you think about your life and your spending habits. The Millionaire Mindset will make financial success repeatable and sustainable, no matter what life throws at you.

As an added bonus, I'll let you in on a little secret of the rich: their money works harder than they do. You are only one person: you need to eat, sleep, spend time with your family and friends, and enjoy hobbies away from work. Your time and energy are limited.

A business with 10,000 employees can accomplish much more than a single individual ever can! That goes for investments in stock, real estate, bonds, etc: investments don't sleep, eat, or get distracted. Your money will earn a lot more in appropriate investments than you can. Granted, there is some risk to investing, but you can minimize that risk if you diversify properly. Talk to a professional for specific advice for your circumstances.

If you patiently work on the Millionaire Mindset, you just might find yourself in a position of independence you never thought you could achieve!

Any thoughts? Share them in the comments! 

1 comment: