“Most people have it all wrong about wealth in America.”
You Don’t Need A High IQ To Build Wealth
Most people struggle with money because it’s being taught too much like physics — with rules and laws — and too little like psychology — with emotions and nuance.
As Morgan Housel said in The Psychology of Money, “Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.”
Truth is, your behavior matters much more than your IQ when it comes to money.
To become wealthy, you don’t need to be highly intelligent. Rather, you need to be in control over your mind, habits, and behavior. You need to master your psychology.
Charlie Munger, Warren Buffett’s business partner, once said:
“A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. And that is why we say that having a certain kind of temperament is more important than brains. You need to keep raw irrational emotion under control.”
You can have the perfect investment strategy and use the most complicated personal finance spreadsheets, but none of it matters when you don’t control your emotions:
Keep your impulses under control when you see a shiny new TV in the store
Keep your ego under control when your neighbor just bought a bigger car than you
Keep your fears under control when the stock market dips — don’t panic sell when stocks are at their cheapest
Keep your greed under control when the stock market rallies — don’t take uncalculated risks
Keep your impatience under control when wealth-building takes too long — don’t fall for ‘get rich quick’ investments
Some of the smartest people in the world are terrible at building wealth because they lack emotional control.
They might be great at learning hard skills (such as engineering, physics, medicine, etc.) but not at learning the soft skills (self-discipline, patience, emotional control) necessary to build wealth.
That’s why, if you want to become wealthy, you’re better off studying human psychology rather than studying complicated financial formulas or fancy investment strategies.
Read also: 13 financial myths keeping you poor
The more we start to see money as psychology and less like physics, the better we set ourselves up for financial success.
Assets > Liabilities
According to Robert Kiyosaki’s book Rich Dad Poor Dad, there’s one essential lesson you need to learn if you want to build wealth:
You must know the difference between an asset and a liability — and buy as many assets as you can.
According to Robert Kiyosaki, “An asset puts money into your pocket. A liability takes money out of your pocket.” In other words, owning assets makes you wealthier, while owning liabilities makes you poorer.
Examples of assets are:
Although assets initially take money out of your pocket in the form of investment capital, they put more money into your pocket in the form of dividends, rental income, capital gains, or royalties.
In other words, by owning assets, you let your money work for you. Each dollar you put towards assets works for you to generate more dollars. It’s the foundation of building wealth.
As Robert Kiyosaki said in Rich Dad Poor Dad:
“Once a dollar goes into the asset column, it becomes your employee. The best thing about is that it works 24 hours a day and can work for generations. Once a dollar goes into your asset column, never let it come out.”
The more assets you own, the harder your money works for you. One day, your assets might produce so much passive income it surpasses the active income from your work.
But the one thing that’s stopping people from acquiring assets is that they spend most of their income on liabilities.
Liabilities are things like:
Credit card debt
Mortgage (unless it’s for a property you intend to rent out)
Insurance & maintenance payments (the more expensive your car/tech/house/luxuries, the higher the insurance & maintenance costs)
The higher your liabilities, the more money flows out of your pocket each month. This forces you to work paycheck to paycheck, and makes it nearly impossible to invest enough in assets.
This is a trap the middle class tends to fall into.
They work hard for their money, only to spend it all on luxuries, high living expenses, and expensive toys. Rather than using their income to acquire assets, they acquire liabilities. This keeps people stuck in the rat race.
“People have learned how to work hard, but not how to have their money work hard for them,” said Robert Kiyosaki.
The bottom line is that if you want to build wealth, focus on reducing your liabilities and increasing your assets.
By acquiring assets, you let your money work for you. By acquiring liabilities, you’ll have to keep working hard for money. It’s a fundamental difference.
All in all, as Kiyosaki said in Rich Dad Poor Dad, “Keep expenses low, reduce liabilities, and diligently build a base of solid assets.”
You Don’t Need a High Income To Become a Millionaire
Most people believe earning a high income is the most important factor in becoming wealthy. And although a high income can undoubtedly help, it’s not the most important thing.
Thomas Stanley (Ph.D.) and William Danko (Ph.D.), authors of The Millionaire Next Door, discovered that 64% of self-made millionaires never made more than $100,000 per year.
This shows that, contrary to what most people think, you don’t have to earn a sky-high income to achieve millionaire status.
As said in The Millionaire Next Door:
“Most people have it all wrong about wealth in America. Wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthier. You are just living high. Wealth is what you accumulate, not what you spend.”
For most high-income earners, high income = high consumption.
This is called lifestyle inflation (or lifestyle creep). It makes for a lot of fun, but it’s no way to build wealth.
What matters more than how much you make is how much you keep.
For example, those who make $60,000 and save (or invest) 15% of their income can be considered wealthier than those who make $150,000 but spend it all.
This is why financial planning, self-discipline, and frugality are more important factors in wealth-building than your annual income.
Of course, the more you make, the more you can save and invest. But this requires the right financial habits. If you don’t put these habits in place first, more income will simply turn into more consumption.
In other words:
Financial Habits > Income Earned
So yes, definitely focus on increasing your income. But make sure you first put these financial habits in place:
Financial planning & budgeting
Living below your means
Self-discipline (the ability to resist impulsive purchases)
Consistent saving & investing
As said in The Millionaire Next Door, “There’s a fundamental rule regarding wealth building: Whatever your income, always live below your means.”
CONTRIBUTED BY Jari Roomer
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