“A lot of people with high IQs are terrible investors.” — Charlie Munger
Don’t Lose Your Money
You work hard for your money, so you shouldn’t squander it.
You’re literally trading your time for money, so when you waste money, you waste the most precious asset of life: your time.
Whether it’s due to mindless spending, reckless investments, or bad habits, people waste their money all the time.
And so did I…
Back in 2014, I lost my life savings (about $15k) due to a bad gambling habit. Fortunately, I faced my demons and beat my addiction.
But the money I lost gambling set me back at least 1.5 years in terms of my finances.
If you want to achieve financial security — let alone financial freedom — you need to imprint these words of Warren Buffett into your mind:
“Rule number 1: Never lose money.
Rule number 2: Never forget rule number 1.”
I know this advice might sound too simple. But it’s the core of building wealth.
Every time you lose money (again, impulsive purchases, bad habits, or reckless investments), you set yourself back in your journey to financial freedom.
You work hard for your money, so don’t lose it.
Master Your Psychology
Your financial health depends more on how you behave than how much you know. It’s more about psychology than IQ.
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.”
To build wealth, you’re better off studying human psychology than complicated financial formulas or fancy investment strategies.
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.
As Charlie Munger 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.”
Keep fear under control when the stock market is falling and everyone around you is panic-selling their stocks.
Keep greed under control when it seems like certain assets are ‘going to the moon’ (just look at crypto, for example).
Keep your impulses under control when you think about squandering money on a shiny new item.
Keep your ego under control when your neighbor or colleague just bought a bigger car than you.
All in all, learn to master your mind. Wealth comes from how you behave, not from how much you know.
Consumer Mindset → Investor Mindset
When you’d give a random group of people $10,000 each, 95% of them would 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.
As J.L. Collins, author of The Simple Path to Wealth, said:
“Stop thinking about what your money can buy. Start thinking about what your money can earn.”
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 that’s the ‘secret’ of the wealthy: They don’t just work for money, they let their money work for them.
“You have to move from just working for money to a world where money works for you.” — Tony Robbins
By investing your money in stocks, index funds, or real estate, you’ll make passive income in the form of dividends, rental income, or capital gains.
When the passive income generated from your investments can pay for your expenses, you’ve reached financial independence.
But it all starts with putting your money to productive use.
If one day you want to stop working for money, you’ll have to let your money work for you.
And the earlier you start, the sooner you can stop working.
Money Management > Income
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 and William Danko, authors of The Millionaire Next Door, found 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 author Thomas Stanley said:
“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.”
What matters more than how much money you make is how well you manage your money.
This means you have to develop the right financial habits:
Living below your means
When you learn to cut unnecessary expenses and live on less than you make, you can build your savings.
And savings provide you with options, security, flexibility, and investment capital. It’s the foundation of financial health.
Increase Your Income
By learning how to cut costs, follow a budget, and live below your means, you build the right financial foundation.
But here’s the key:
You don’t have to choose between saving more or earning more — you can do both.
As Ramit Sethi said in I Will Teach You To Be Rich:
“There is a limit to how much you can save, but there’s no limit to how much you can earn.”
Yes, saving money is important. Essential, even.
But there’s a limit to how much you can save per month. You can only cut your expenses so much before there’s nothing left to cut back on.
That’s why you shouldn’t just focus on cutting expenses, but also on increasing your income:
Negotiate a raise
Switch to a higher-paying job
Start a side-hustle
Start (or scale) your own business
Raise your freelance rates
Once you learn to live on a budget, the extra money you make can directly flow into your saving- and investment account.
CONTRIBUTED BY Jari Roomer
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