Change the Way You Think

The following is an excerpt from Dollars & Uncommon Sense: Basic Training for Your Money.

Most people scratch their heads and wonder why they are in the same financial predicament as everybody else. Assess the situation around you. Look at your friends, family, and neighbors. How many people do you know who live paycheck to paycheck? Do you know anyone who is worried about how they’re going to pay their rent or mortgage, or what they’re going to do about grocery money? Do you know someone whose utilities are on the verge of being cut off? Can you think of anyone you know who is worrying about how they’ll get by if they lose their job? Are you one of them?

Perhaps, like most people, you are stressing over how much debt you have and are just making minimum payments on all of your credit cards. Are you looking for a way out? Or are you coping with the problem by telling yourself that everybody you know is in debt, so it must be okay that you are, too?

Retirement? What’s that? Are you thinking you will be dead by then, so you don’t have to worry about that now?

I could go on forever and ever. The truth is that most people are living paycheck to paycheck.  Most people have some sort of debt they are worried about. Most people worry about losing their job and wonder how they will pay their bills if that happens. Most people wait until they are 55 to even start thinking about retirement. Most people worry about their money.

So why in the heck would you want to be like most people?

These days I am happy to say that I am not like most people. But to tell you the truth, I used to be.

When I was growing up, my family had little or no money. I lived in a trailer park. Both of my parents worked hard, and I never went hungry and always had a shelter over my head. I had clothes to wear, but at times, kids made fun of what I was wearing. Neither of my parents went to college, so education wasn’t stressed that much. As long as I had passing grades, they were happy. As I got older, I took part-time jobs after school for extra money. After graduating high school, I enlisted in the Army.

I was just like everybody else with my money. I spent everything I made, lived paycheck to paycheck, and had no savings to speak of. I really didn’t understand why I needed savings. I only had a little debt, I thought. But the truth was that I racked up more than $32,000 in credit card debt. I thought that was okay. I told myself that everybody has credit card debt and that it couldn’t be a problem, because I was able to make the minimum payments each month. As for retirement, I was young and thought to myself that I would worry about that later.

I worked my way up the ranks, and after 12 years of service I decided to move on. From the contacts I made in the military, I was offered a job in finance. I hadn’t set out to make a career in finance, but someone saw a talent in me that I hadn’t recognized yet myself. And it was the best thing that could have ever happened to me. What I am going to tell you next is what started me on the path to changing the way I think about money.

It was the first time I saw real money. I was an investment representative for a national broker-dealer in El Paso, Texas, and I had been in the business for only a few weeks. A couple in their 40s came into my office and told my receptionist that they needed help investing some of their savings. She showed them into my office, they sat down, and I started gathering information from them. They were just normal-looking people. They didn’t look or act rich, I thought to myself. I told them that before I could open an account, I had to find out where the money was coming from—for example, insurance proceeds, the selling of a business, or an inheritance. The couple told me the money was part of what they had in their savings. After I completed the paperwork, they wrote a personal check for $25,000 to be deposited in their account. I still remember to this day how my hands were shaking when they placed that check into them. I never knew that normal people could have that kind of money. I didn’t know that ordinary people could write a personal check for that much! I thought only people with rich parents or an inheritance had money and that the only way regular people could ever have money like that was if they won the lottery or something.

I wasn’t totally convinced yet that regular people could have money in their savings accounts without luck, but this was the day my mind-set started to shift.

I want to share another story with you that also happened very early in my career and confirmed that I really did need to start thinking differently about money. On this day, I had two appointments scheduled, one in the morning and the other in the afternoon. Looking out the window, I saw my first client, a lady in her early 50s, drive up in a nice European sports car. As my receptionist escorted her into my office, I thought to myself that she was wearing a pretty expensive-looking wardrobe.

The first thing she told me was that she was an executive who worked for a software company. She went on to tell me that her salary was close to $300,000 a year. In the back of my head, the wheels were turning. I was thinking, “She must have a ton of money she wants invested.” Then she told me that she had to exercise some of her company stock options because she was about $50,000 in debt with her credit cards and could no longer make the minimum payments.

I wondered to myself how anyone who made that much money could have problems making the minimum payments on her credit cards. I know the answer now, but at that time, I was still thinking like most people.

That afternoon, my second appointment arrived. I saw her drive up in her late-model sedan. She was nicely dressed but wearing nothing as fancy as my first appointment had worn. I asked her to tell me a little bit about herself. She told me she was a schoolteacher, her salary was about $30,000 a year, and she was about to retire.

I am embarrassed to say that I remember thinking to myself that she probably didn’t have a lot of money to invest. When I asked her how much she wanted me to manage, I almost fell out of my chair: She had close to $400,000 in her retirement account.

I thought to myself, “How in the heck could a schoolteacher who doesn’t earn much accumulate so much wealth?”

Scenarios like this have played out time and again in my office over the years. The most important fact I have learned from this is: It doesn’t matter how much education you have or how much money you make, it’s the way you think about money that determines how much money you have. The reason most people are bad with money is that they believe they are bad with it. They believe they can’t do anything about it. They believe they will never have more of it. Your first step is to quit thinking like that.

Most of my clients are 55 or older. On average, they have between $500,000 and $1 million of investable assets. (I usually don’t like working with people with more than a million, because they think they are smarter than me . . . which may be true!) What I want you to take away is not how much money my clients have, but how they got their money. Most of my clients are just average people. Most of them were not corporate executives, doctors, or lawyers. Over the years of managing my clients’ wealth, I have found that they share common traits in how they think about money and, as a consequence, what they do with it. I call these the 6 Key Traits of Wealth Builders:

1. They spend less money than they make.
2. They have little or no debt.
3. They save.
4. They have long-term plans for their money.
5. They do not let emotions cloud their judgment when they make financial decisions.
6. They start saving early in their careers.

You might not have any control over that last one if you’ve already been in the workforce for a while and are only now getting serious about your money. That’s okay, because if you take a look at the other five key traits, you do have control over those.

This works for everyone, not just clients of financial planners. I know this because a few years ago, in addition to managing people’s wealth, I started doing consulting work as a contractor for the Department of Defense. On the weekends, I would speak to service members and their families and provide them with free financial education and counseling. I really love doing that, because I know that if someone had taught me to think differently about money back when I was in the Army, I would have been so much better off.

Well, over the past few years I’ve discovered that the 6 Key Traits of Wealth Builders apply to people in the service, too. Since I have been in the military, I know that you really don’t make that much money. Yet when I met with these people, I learned that some of them had been able to accumulate a good sum of money. I asked them about their backgrounds, and it turned out their wealth had nothing to do with their rank or education level. The servicemen and women with money were those who spent less than they made, took on little or no debt, saved, planned for the long term, kept emotions out of their financial decisions, and started early.

The bottom line is that you don’t have to make a lot of money to have a lot of money. If you learn to spend less, you will have more. It sounds so easy, and it is something you probably already know. The difference is that in the following chapters we are now going to do something about it, by changing the way you think about money—and then you will begin to change what you do with your money.

The Take Home

• Most people worry about their money. You don’t want to be like most people.
• It doesn’t matter how much education you have or how much money you make, it’s the way you think about money that determines how much money you have.
• There are 6 Key Traits of Wealth Builders:

1. They spend less money than they make.
2. They have little or no debt.
3. They save.
4. They have long-term plans for their money.
5. They do not let emotions cloud their judgment when they make financial decisions.
6. They start saving early in their careers.

• You don’t have to make a lot of money to have a lot of money. If you learn to spend less, you will have more.

Comments

[PFM]

Never judge a book by it's cover! It took me a long time to learn that, I thought everyone who drove a new BMW or Mercedes must be very wealthy, what I come to find out is they usually have more debt than anything else. I had met with a financial planner many years ago, he thought I only had $4000 to invest, he was ready to end the meeting quickly until I showed him my spreadsheet that showed many times that in liquid assets, he was then very interested in talking to me, I ended up not using him.

[Matt]

Nice story. Here is mine.

There is a guy at work who does the same job as I do,probably makes the same as I do and was in real financial straits when he was laid off for 4 months. He drives a Caddilac while I drive a Chevy Malibu. He leases while I own the car. He was tapping into his 401k while laid off becasue he did not have a reserve but he is 62 so no penality where as I am 48 and it would be.

I am not sure how much he has saved for retirement but my assumption would be that I have more because he NEEDS to drive that $400 a month lease Caddy where I don't care.

[CH]

So true - I see this daily -- I'm reminded of meeting with the client who was going to buy a new car at a luxury dealership near my office -- when I asked him "oh, are you going to buy a (fill in the blank with whatever luxury car you care)" he responded, 'no way, I wish I could afford that, I'm buying something that someone traded in' (that cost half as much). This, as I'm looking at his balance of close to $2M investment portfolio.

[Old Limey]

My story also follows a similar pattern.
My parents were born in England in 1908 and 1910 and neither went to high school. My mother took care of writing letters for my father because of his lack of literacy. He did go on to have a long career as a fireman and during WWII his unit was often sent up to London to help out during the Blitz. For spending money I did a morning paper route before school.

I became an aircraft apprentice in 1951 when I was 17 and gave my parents half of my pay to help with my keep. I obtained the equivalent of a BS degree in aeronautical engineering before my wife and I emigrated first to Canada in 1956 and then to the USA in 1958 where my aerospace company paid for me to get an MS degree. My parents never owned their own home and when they died there was just enough money for me sister to cover their final expenses. I was the first in our whole extended family to ever obtain a degree.

The most important "Life lessons" that I learned from my parents and the extended family, particularly during WWII, were to avoid debt, to live frugally, and to save all I could. Fortunately my wife came from a very similar background and I can guarantee that today you couldn't find two more frugal multi-millionaires than us. We have also been able to travel all over the world to fantastic places and were able to afford it because at the age of 58 when I retired I used my computer and math skills to become a very successful investor and hit some great times in the market and the economy.
When I look at my monthly brokerage statement, which is now all in income investments, it never fails to amaze me how "Money makes Money" in an effortless way that sure beats having to work for it or to manage rentals and deal with bad & non paying tenants on occasion.

[retirebyforty]

Great stories. Thanks for sharing. I guess the millionaires next door is a true story after all. :)
Spending less money than they make is the key to financial independence. If you spend more than you make, you'll just be stuck in debt cycles.

[skrpune]

These stories are right on - the more I see and experience, the more I find out that the folks who seem to be flashiest with their money are usually being flashy with someone else's money! I've had multiple coworkers and even managers who made more money that I make and who are somehow always in financial straits...but then again, I'm not into fancy cars, I bring my coffee & lunch to work, I don't buy $200 sunglasses or designer clothes, and I've learned to save and budget and invest. I'm by no means a millionaire, but I'm fiscally mindful, and that's more than I can say about a lot of other people.

[JimL]

With delayed gratification, you can be financially secure and enjoy the good life. We can examples of people on this board that can now travel the world and have any experience they wish, without the worry of being in debt.

Goes with the Dave Ramsey line: "If you live like no one else, someday, you will get to live like no one else".

[tamdra]

Was anyone struck by the thot that this man who has a poor relationship w/money is managing others money? Lol

Call me contrary, but if you cannot manage your own...you will not be managing mine.

[Jclimber]

@tamdra - Exactly. Seems like a really poor choice for a financial advisor/manager.

[anonymous]

If this is really how people think that explains why so many people hate the “rich.” This only further proves that so many American’s don’t want to make any sacrifices, they only want handouts. And then these spendthrifts have the audacity to point fingers at those who do forgo luxuries and work hard to build a better future.

[Jon Smith]

I frequently let emotion dictate what I spend my money on, don't earn very much, and have a large amount of debt.

That said, I'm saving more than I'm spending by a considerable margin, simply by countering my emotional spending with sensible finances the rest of the time. It is possible, although people don't often like it.