Chapter 3
Know Where You’re Starting From
Complete this sentence: Money is ____________.
Whatever word or words you use to complete this sentence is a good indication of your money mindset.
We all carry beliefs about money that got started during childhood and developed over the course of our lives. These beliefs influenced our ideas of what we need and want, what we love and like, and what we deserve. Those ideas taught us what to avoid and what gives us comfort and security.
Everyone has a money mindset. You may not be aware that your current financial situation is a result of this mindset. A money mindset—how you think and feel about money—creates a set of beliefs that determines your behaviors, attitude, and outlook with respect to life and money. It impacts how you manage money and your finances. Your money mindset may often vary from other people’s mindsets, because we all have different life experiences that shaped our beliefs about money. Your money mindset may have initially come from your parents and may eventually have been influenced over time by retailers, the media, and the people you’ve surrounded yourself with.
Your Money Mindset
When weighing material desires such as wanting a bigger home, a nicer car, or a dream vacation against the reality of debt, bad credit, or low income, we can end up making decisions that compound our financial problems, preventing us from achieving our goals. Our emotions cannot be separated from money; therefore, we must become more aware of how our emotions impact financial decision making.
Through the process of awareness, I realized that I had held on to money beliefs that were based on a fear of scarcity. I had what’s called a scarcity mindset, and my financial behavior was based on that thinking. A scarcity mindset is a belief that there isn’t enough money to go around, and that money can only be made one way and must be spent before it’s taken away. I grew up believing there was not enough money, and that belief became the basis of my spending behavior. I operated with a money philosophy that my paycheck had to be spent entirely and that material goods were the top priority. I did have financial goals, and I had the financial means to achieve them, but my scarcity mindset led me to spend mindlessly and prevented me from reaching my goals.
After a series of financial setbacks and continued dissatisfaction in life, I began a quest to learn more about my relationship with money and to determine whether I was in control of my life, and if not, whether I could regain control of it. I asked myself these three questions:
- What is my relationship with money?
- How is my spending contributing to my life?
- How am I using my time?
Answering these questions increased my understanding of the money beliefs and values I held. This knowledge allowed me to reshape my mindset from one of scarcity to one of abundance. The abundance mindset revolves around the idea that there is plenty of money and many opportunities to make more of it. With a mindset of abundance, you make decisions based on the belief that there is enough money for everyone, making you more mindful of your spending and financial decision making.
What Is Your Relationship with Money?
I used to believe that money was important because it represented status and control. I spent money to improve my social status and to show others that I was in control of my life through my ability to spend and with the things I owned.
Money controlled my happiness. I found myself at the mercy of money, hoping it would deliver the satisfaction I sought. I was happy when I had some and stressed when I had none. It was rather an abusive relationship that kept me on an emotional roller coaster. I would anticipate the arrival of my paycheck every other week, and the size of my paycheck determined how happy I was over the weekend. I worked hard for money, but I spent it easily. I traded more hours of my life to earn more money to spend more money to feel no real satisfaction. Through the process of awareness, I realized I was neither in control nor improving my social status. I was digging myself into a deeper financial hole. I wasn’t the problem. Money was the problem. This line of thinking made me resent money, and I began believing it to be the root of evil. My feeling toward money increased my disdain for it. Why would I hold on to something so bad? Why would I want to make more of something evil?
Do you think money is evil?
Money is neither good nor evil; however, it can be used for either kind of purpose. While some use money to live their dream lifestyles, there are many others who are controlled by money (as I once was). When you view money as good, not evil, you see money as a tool for change and therefore want to make more of it to positively impact your world. I, however, didn’t learn how to make money work for me. I continued to trade my time for money. I learned to fear money, and then I fell under its control.
Does money control you or do you control it?
Think about your current relationship with money and whether it is working for you. Money can conjure up images of abundance or scarcity. Does the thought of money conjure up feelings of fear or empowerment? For many, money elicits fears such as the thought of debt, low wages, and the inability to cover basic needs. A relationship based on fear may cause you to spend more than you make and rely on credit that shackles you to the debt ball and chain.
When money makes you feel empowered, you think about ways to make more of it without exchanging more of your time for it. You’re also making sure that you spend it on what adds value in your life, that you save for what’s important, and that you invest in assets as income streams.
Do you believe you deserve to be wealthy?
My answer is yes. You deserve to achieve your financial goals and live your dreams. Cultivating an abundance mindset will give you control and enable you to use money as a tool to achieve your goals.
You need to uncover your true feelings about money and how it makes you feel. Be mindful of the words you’re using to answer these questions and the thoughts that are coming into your mind. I’ve found that our initial answers only scratch the surface, so we need to dig deeper. You may find yourself faced with some uncomfortable truths about your relationship with money. Do not shy away from these feelings. Write them down. Don’t judge yourself during this discovery phase, either. You are on a fact-finding mission and your goal is understanding, not judgment.
If you come to realize that your money mindset has kept you from achieving your goals, then you have an unhealthy money mindset and it’s time to change your money beliefs. In contrast, if you discover that your money mindset has allowed you to live your dream lifestyle, make note of what you’re doing right to continue the progress.
How Is Your Spending Contributing to Your Life?
I knew I had a spending problem. I read books and blogs, attended seminars and workshops, and used many apps to monitor my spending. However, I noticed that my anxiety grew while my spending habits remained unchanged. My problem wasn’t due to the size of my paycheck, the interest rates on my credit cards, or the debt I held. It began with the person staring right back at me every time I looked in the mirror. I spent money to feel in control. The more I felt lost in life, the more I spent. This was all in an effort to convince myself that I was in control of something—buying things. I bought things because it was a choice—my choice to spend my money. My spending was directed at consumables and depreciating assets and nothing of long-term value. Through awareness I gained understanding, but it took some time before I fully admitted to my unhealthy money mindset that drove my irrational spending behavior.
Here is an indisputable truth: You work to earn money in order to spend money. Whether you decide to spend your paycheck today or later in retirement, you are working to earn money in order to spend it. How you spend, what you spend, and why you spend money have a lot more to do with your money beliefs than simple economics. Based on your money mindset, you value certain items over others because of the worth you give them.
What are you spending on?
I bought things of value. I just didn’t buy things that added value in my life. I spent money on things I didn’t need and complained that I couldn’t afford to invest in things I wanted, such as personal development. Think about the last purchase you made that still provides the same enjoyment as the day it was bought. Likewise, think about the things you want to buy that can have a far greater impact on your quality of life. You might even have a list of things you want to accomplish but have convinced yourself they are financially impossible.
If you’re not aware of your values, you may find yourself spending on things that do not matter. When you’re investing in yourself, you’ll choose to spend on things that improve your situation for the long term, such as new skills, hobbies, and investments. Determine what purchases support your long-term satisfaction and why they are important to you. To gain awareness about your spending mindset, be honest about the emotions that play a key role in what you value and why.
What emotional need are you looking to fill?
We should prioritize spending on things that contribute to our quality of life and help us progress toward our goals. Spending on anything else is a waste of resources. If through answering these questions you discover that you are spending on things of value to you, then it’s safe to say you have a healthy money mindset. In contrast, if your spending does little to add value to your life, you have an unhealthy money mindset. You may need to change your spending habits, because not doing so may cause you to rely on credit. Spending without adding value to your life can lead to debt and future financial stress that will weigh on your mind and slow your progress toward your goals.
When you’re spending on goods and experiences that don’t align with your objectives or add no value in your life you are spending mindlessly. Mindless spending for short-term gratification prevents you from spending on things that matter long-term. This instant gratification may feel good at the moment, but that feeling can also be gone in an instant. Remember, don’t stress—you can change your mindset and spend mindfully. I’ll show you how in the pages that follow.
How Are You Using Your Time?
I was reckless with my time. I had no concept of its real value: I frequently exchanged my time for more dollars so I could buy more things. I believed time was limitless and that all I needed to do was to work more hours to make more money. The reality is that there are only so many hours in a day and so many days in a week. I eventually reached a limit in terms of my physical health from working so many hours. All those hours worked took a tool on my mental and psychological well-being.
Unfortunately, due to my lack of awareness of my unhealthy money mindset, I began using credit to support my spending. As the credit card balances grew, credit morphed into long-term debt. Debt meant my future time had to be reserved for work and chained me to my job. It became my figurative ball and chain, reminding me that my future did not belong to me.
It would be years later that I would discover that I should focus on increasing the exchange value of my time. However, even that goal needed to evolve to the point at which I would no longer exchange my time for a paycheck. As I increased my awareness and cultivated a healthier money mindset, I began investing time in accumulating assets that generated income streams that freed my time to be used on things that mattered most to me.
Are you treating your time as a valuable finite resource?
Time is the one thing you were born with and the last thing you’ll own. Time is the most valuable asset we naturally possess and we exchange this limited resource for money. In fact, the majority of us depend on this exchange for our financial livelihood, but the relationship is one sided. You can always make more money, but you can never make more time. When you have a disregard for your time, you’ll find lots of it wasted. Once time is spent, there is no way you can buy it back. Keep this in mind: How you spend your time says a lot about who you are and what’s most important to you. Think of your purchases in terms of your time. If you’ve purchased an $800 smartphone and you make $10 per hour, understand that 80 hours of your life has been spent on that purchase.
Are you investing in yourself?
Your first priority should be your well-being, and that means investing your time to improve your skills and increase your knowledge. The more refined your skills are, the more valuable your time becomes. You don’t need to work more hours. You need to invest time to increase your value to command a higher salary. Take a moment right now to assess your relationship with time.
Cultivate a Wealthy Money Mindset
It will take time to cultivate a healthier money mindset. You’re working to unlearn many of the limiting money beliefs you’ve held since childhood and undo many of the financial habits you’ve created. Even small changes in your money beliefs can have a compounding effect on your attitudes, behaviors, and decision making. Progress can and will happen, but you’ll need to remain persistent and practice patience and self-awareness.
A wealthy mindset is based on abundance, which can bring peace of mind and help you to gain clarity about a vision for your life. A scarcity mindset is based on fear, which creates barriers that will prevent you from living your dreams. In the following sections you’ll learn about the importance of having a vision for your life and how to define a money philosophy to make better financial decisions that align with your values.
On the road to your financial wellness, think of your money mindset as the compass to direct you toward your destination. The better your compass, the smoother your road trip will be. To cultivate a wealthy mentality, fine-tune your compass with the following six fundamental money mindset lessons. We have some limiting beliefs when it comes to money, and although the following advice is nothing new, we need to discuss them in the context of living a purposeful life.
Money Can Buy Happiness
One thing I’ve learned from the wealthy is that money does buy happiness, and those who understand that concept make better financial decisions. Happiness is not measured by your income or the amount of savings in your bank account. It isn’t measured by the size of your home or the features in your car. And it isn’t measured by the fancy dinners you eat or the exotic vacations you take. Happiness is a result of realized dreams.
As a child, I never had to worry about shelter, food, or clothing, but I didn’t have luxury goods or my own money to spend. I was raised believing money doesn’t buy happiness. Money was just a means to exist. That lesson created a mindset with a counterproductive result. I didn’t use money as a tool to improve my life. I spent money without awareness of its impact on the life I was living. If money didn’t buy happiness, then there was no real purpose in making more of it, aside from defining success based on dollar signs.
However, money can buy happiness in terms of comfort and security. If I spent money mindfully and with purposeful intent, I could positively impact my well-being. I needed to think of money as a tool, not the end goal. Money helps us afford basic human needs, such as housing, food, medicine, and clothing. If you lack money to pay for these needs it is more challenging to live comfortably. As a result, you can find yourself more stressed about your situation. When you make more money, you can afford additional comforts in your life, and with awareness you’re able to make financial decisions that align with your values.
Knowing that money can buy happiness can make it easier for you to choose long-term happiness over short-term satisfaction.
Live Your Dreams, Not Someone Else’s
During the height of the real estate bubble, my parents decided to remodel their home. My parents weren’t alone in the neighborhood. It seemed at the time that everyone on my block was improving their house’s curb appeal.
“You’re keeping up with the Joneses,” said the mailman to me after I signed for a package.
It was the first time I’d heard this phrase, and I wondered where in the neighborhood the Joneses lived. The Joneses, I soon learned, were not a literal family down the block but a statement referring to a desire to enjoy a social status comparable to our neighbors. I am not sure if my parents’ desire to remodel came from a desire to keep up with our neighbors. But as I soon learned, it did stem from the general idea at that time of doing what others were doing: Improving their homes to raise their real estate value.
Keeping up with the Joneses is a vicious cycle that never ends. In fact, as you try to keep up with your Joneses, those Joneses (i.e., other people) are trying to keep up with their own Joneses, too. Instead of worrying about what others are doing with their money, you should only be concerned with how you’re using yours. Don’t work harder to get what everyone else has, because that isn’t going to bring you happiness. The stress of keeping up with the Joneses will add to your continued dissatisfaction. You may find yourself financing items to preserve social status and end up compounding the financial stress that you’re feeling.
Don’t try to keep up with the Joneses, but do keep your vision and goals in mind when making purchases that add value in your life. If you attempt to keep up with the Joneses, you’ve actually given other people control of how you spend your money. You won’t be spending money on your dreams; you’ll be spending it to live theirs.
Don’t Inflate Your Lifestyle
Lifestyle inflation is increasing your spending at the rate at which your income increases. You might be thinking the obvious: We earn more so we can spend more. However, if it remains unchecked, lifestyle inflation can prevent you from reaching your financial goals. It keeps you in the cycle, unable to pursue dreams because you need to continue to work just to pay your bills.
You might tell yourself that you’ll start your emergency fund after that annual salary increase you’re expecting. Or you’ll begin to contribute to your company’s 401(k) plan after a promotion. You might even convince yourself that a higher-paying job is the only solution to getting out of debt. However, because of lifestyle inflation, you may still find it difficult to achieve these financial goals because you’re spending $75,000 at the same rate you spent your $35,000 salary.
When I was making minimum wage, I was able to afford the things I needed but dreamed of buying the things I wanted. As my income grew to four times the minimum wage rate, I noticed the things I wanted became things I needed. What seemed like luxuries at one point in time became standard, so I sought more expensive wants. I didn’t realize at the time I was experiencing lifestyle inflation. The cost of my lifestyle was increasing at the same rate as my income. I went from a reliable used car to a new Toyota Camry to a BMW 3 Series coupe to fill the need for transportation. The more I made, the more willing I was to pay a higher price for new luxuries.
There is nothing wrong with wanting luxury goods and spending money on them; however, if it keeps you from achieving your goals, then it is a problem. If your lifestyle is inflating, then you are going to find it difficult to save money, get out of debt, and invest in your retirement.
The Purchase of Things and Experiences Is the Same Thing
There are studies that have found that spending money on experiences has a far greater impact on your happiness than spending on things. Experiences have a profound effect on how we view the quality of our lives, whereas things have a depreciating effect on our happiness. Even with this disparity, experiences and things are similar in that there’s a cost to both. You’re either spending money on things or spending time on experiences. For many of us, however, experiences trump things.
Let’s try an exercise.
Think of an item you bought recently because you absolutely loved it. Do you feel the same level of happiness as when you first made the purchase? You might realize you don’t feel the same and have become indifferent toward it.
Now, can you think of a memorable experience with a loved one you’ve had? What are you feeling right now? Do you find yourself smiling? If you’re feeling a sense of happiness, that’s because remembering experiences can help you relive that moment.
There are situations when things can add to the experience. When I owned my BMW, it was quite an experience driving through the winding roads of Napa Valley as the car smoothly accelerated and hugged the curves. As I think of that experience, I reminisce happily about those moments.
Whether you decide to spend your money on the finer things in life or spend it traveling around the world, spend on things that matter to you. You can spend money on expensive clothes, luxury brands, or a backpacking trip just as long as you understand how your purchase supports your vision for your life.
Wealth Is Not Measured by How Much You Spend but by How Much You’ve Saved
Wealth is being popularized as a state of mind, but I want to focus on wealth from an economic perspective, as the abundance of money. Wealth is not how much you make or how much you spend. If the ability to spend money determined wealth, I would have been considered wealthy a very long time ago. Having wealth means you have more than enough money to cover your living expenses now and well into the future. Wealth is calculated based on how much cash you’ve saved and the investments and properties you have.
For example, a person who makes $50,000 a year and is saving half of her salary can be wealthier than a person who makes $100,000 and only saves 10 percent of his salary. During a lecture at a manufacturing company in Menlo Park, California, a production-line employee making $55,000 a year shared that he owned two homes, had an emergency fund, contributed to the company’s 401(k) plan, carried no debt, and was on track for retirement. He attributed his financial well-being to saving as much as possible of what he makes. This is the complete opposite of a managing director from Boston, who told me he was making $115,000 a year but couldn’t find an extra dollar to save toward his children’s college fund. After going through his income and expenses, he saw that his spending was outpacing his income. He came to the conclusion that he just needed more money.
Accumulating wealth can be a result of purposeful living. You may find that when you have a vision for your life, you are spending less and saving more. You are able to cover your financial obligations and still have money left over. You don’t have a dire need to work in order to pay your bills. This frees up your time to focus on the things that matter most to you: Achieving your dreams.
Make it a priority to build your wealth. In accumulating wealth, you are not limited by your income but by your mindset about how it can be achieved. Keep your living expenses way below your means, spend less, and save more and invest in things that appreciate in value. Again, be mindful of lifestyle inflation and spending habits related to the Joneses that impact your ability to become wealthy.
Make Yourself a Priority and Pay Yourself First
I can still recall working 78 hours in one workweek at a job I had at Newark Airport. To work this many hours, I slept in an office that was located underneath the airport terminal near the baggage loading area. I served drinks in the first-class lounge, helped with chartered flight check-in, and loaded bags into the planes. I’d nap for a few hours, wake up, and take on another shift. I remember being excited to get my paycheck that week, since I would have some money left over after my bills were paid. However, the reality quickly set in: After taxes, distributions, and bill payments, I was left with zero dollars in my bank account. I had no cash left to spend, and that week became the last time I worked that many hours in exchange for a paycheck.
I didn’t realize at the time that by prioritizing everything else except saving money, I was becoming increasingly dissatisfied with my job. My performance suffered, my work relationships deteriorated, and I eventually lost my job.
You might have had a similar experience, or maybe you’re just living paycheck to paycheck. Maybe saving money is something you know you need to do but believe is impossible to accomplish. There is nothing motivating about working day in and day out, only to see the paycheck direct deposited in your checking account gone by the end of the payday. I have learned that saving even a small part of your paycheck every payday can help cultivate a healthy money mindset.
Paying yourself first doesn’t mean spending on whatever it is you want. It means saving money. You may be tempted to pay all your bills, leaving you with nothing to save. Paying your bills is necessary; however, to keep motivated, you need to make some positive financial gains. To accomplish this, think of yourself as a monthly expense that needs to get paid, the same as your cellphone bill. Each payday you must transfer a small amount into a savings account. The amount can be as little as $5 or up to an amount that is financially doable and can be consistently saved each payday. The benefit to saving any amount is building and reinforcing a savings habit. The next step is executing a purposeful savings strategy, which will be covered later in this book.
In the next chapter we’ll discuss the importance of knowing where you want to go, and we’ll help you clarify your values, set a vision for your life, and create a guiding money philosophy.