âStop thinking about what your money can buy. Start thinking about what your money can earn.â
If thereâs one lesson Iâve learned from reading dozens of the best personal finance and investing books, itâs this:
Improving your finances is more about improving your habits than about increasing your income.
No matter how much money you make, without the right financial habits, you can still end up broke.
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But with the right money habits, you can fundamentally change your life.
Build the right financial habits now, and youâll receive dividends for decades.
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As Warren Buffett once said, âThe chains of habit are too light to be felt until they are too heavy to be broken.â
They Put Their Money To Work
When youâd give a random group of people $10,000 each, 95% of them would only think about what to buy with it.
But 5% of people would think about how to put the $10,000 to work (aka, invest it) so it will help them reach financial freedom faster.
Where most people have a consumer mindset, only few have an investor mindset.
âItâs not hard. Stop thinking about what your money can buy. Start thinking about what your money can earn.â
â J.L. Collins (author of The Simple Path To Wealth)
Financially smart people use their money to make more money.
Rather than wasting their hard-earned income on stuff, they put it to work by investing it in income-producing assets.
People with an investor mindset use their money as a tool to reach freedom and independence.
And thatâs the âsecretâ of the wealthy:
They donât just work for money, they let their money work for them.
By investing your money in stocks, index funds, or real estate, youâll make passive income in the form of dividends, rental income, or capital gains.
One day, the passive income generated from your assets could replace the active income from your job or business.
As legendary investor Peter Lynch said, âMoney is a great friend, once you send it off to work. It puts extra cash in your pocket without you having to lift a finger.â
All in all, put your money to work by purchasing financial assets rather than purchasing fancy stuff.
They Resist Lifestyle Creep
The unfortunate truth is that most people spend everything they make. Whatever money comes in today, goes out tomorrow.
Of course, many expenses are unavoidable:
Mortgage/rent
Insurance
Raising kids
Utilities
Groceries
But many expenses are unnecessary.
Whether itâs fancy restaurants, expensive clothing, a bigger house, a faster car, or a slightly better smartphone.
These expenses are a form of âlifestyle creepâ.
Lifestyle creep means when your income increases, your expenses increase just as much to upgrade the quality of your life.
Although thereâs nothing wrong with rewarding yourself for your hard work, donât let lifestyle creep slip out of control.
Those who suffer from lifestyle creep go through life with a consumer mindset rather than an investor mindset.
Instead of thinking about how their money can be used to achieve freedom, they think about everything fancy their money can buy.
But as J.L. Collins said in The Simple Path to Wealth:
âMoney can buy many things, none of which is more important than your financial independence.â
When you make more money, donât just buy more fancy stuff, but buy income-producing assets that help you reach financial freedom.
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They Save, Save, Save
If you want to build wealth, youâll have to develop the habit of saving money on a consistent basis.
As Peter Lynch said in Learn To Earn, âWhether itâs $10 a month, $100 a month, or $500 a month, save whatever amount you can afford, on a regular basis.â
Some people in the personal finance space say you shouldnât save because your money loses purchasing power due to inflation.
Although thatâs technically true, I think it misses an important point:
Learning how to save is the most fundamental step in improving your finances.
Without saving, you canât build an emergency fund to protect you against financial disaster.
Without saving, you donât have any capital to invest in income-producing assets.
Without saving, you donât have the freedom and flexibility to make big life changes.
Start saving as much as you can â itâs the foundation of financial health.
They Continuously Upgrade Their Financial IQ
Building wealth isnât necessarily about making a lot of money â itâs about mastering your money.
As Robert Kiyosaki said in Rich Dad Poor Dad:
âItâs not about how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.â
Thatâs why financial literacy â understanding how to manage your money â is far more important than how much money you make.
Most people who make a lot of money without having learned the financial foundations tend to quickly spend (or lose) their money.
Statistics show 70% of lottery winners end up broke and 33% go on to declare bankruptcy within 7 years after winning the lottery.
Read also: 10 must do’s if you are in financial trouble
And many professional athletes and famous entertainers who made millions in their careers ended up bankrupt too:
Mike Tyson made more than $300m in his career but filed for bankruptcy in 2004
Johnny Depp earned over $600m in his career but almost had to file for bankruptcy
Nicolas Cage earned over $150m in his career but nearly lost it all in 2009
These examples show that even if youâve made hundreds of millions, you can still lose it all when you lack the financial skills to save, invest, and manage your money.
âMoney without financial intelligence is money soon gone,â said Robert Kiyosaki. Thatâs why, no matter which income level youâre at, itâs essential to learn the foundations of financial literacy:
How taxes work
How to invest in stocks
How to invest in real estate
How to make a plan to pay off debt
How to make your money work for you
How to make a monthly expense budget
How to differentiate between assets and liabilities
When you learn these money-management skills, youâll reap the benefits for the rest of your life.
Remember, itâs not necessarily those who make a lot of money who get wealthy; itâs those who manage their money the best who get wealthy.
Itâs those whoâve developed their financial intelligence.
CONTRIBUTED BY Jari Roomer
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