The first step in achieving financial independence is developing a rich mindset. In this post, I am going to do a deep dive into exactly what is that.
In the mid 2000s, Alberta, the oil producing centre of Canada, was literally bathing in dollars, thanks in large part due to sky-rocketing oil prices. The government then decided to hand out a one-time $400 check to every Albertan. Yes, I know it is hard to believe! The cheques were dubbed “Ralphbucks”, after the Alberta premier at the time Ralph Klein.
What was most interesting at the time was that the media was almost wholly focused on how the Albertans were going to spend that money. The media channels showed reporters asking people in public places what they planned to buy. The answers ranged from buying a new pair of shoes to weed (which by the way was illegal at the time but apparently didn’t stop some people from publicly admitting about it – I guess they were too excited about the free handout!).
Looking back at that event, what I found most fascinating is that almost everyone was focused on what that $400 cheque could buy.
What to do with a free handout?
Now just imagine, if you were given a free $400 cheque, what would you do? Some options are:
Option 1: Spend it on a dinner at a fancy restaurant.
Option 2: Invest in the stock market. Historically, the market returns ~8% on average. You can spend the returns and still allow the original capital to remain intact and grow more.
Option 3: Invest in the stock market. But the market can go down and then there is inflation. You can spend half of what you earn in the year the market goes up and re-invest the other half.
Option 4: Invest in the stock market. You re-invest what your money earns. Then you re-invest what that earns. You keep repeating the cycle over and over again till the time comes when you finally need to spend the money.
Of course, there are other possibilities as well. It is easy to tell though which option will keep you poor, which one will get you in the middle class, which one can take you a bit further and which one will make you rich!
How the poor, middle class and rich think about money
Rather than thinking about poor, middle class and the rich simply in terms of how extravagant their life-style is and what possessions they have, you have to re-structure your thought process in how each group uses their money. In other ways, stop thinking about what your money can buy and start thinking about what your money can earn. Once you start thinking about what your money can earn, then think about what that money that money can earn.
Adopting the mindset I just mentioned, we can divide the three groups of people into:
Poor: live paycheque-to-paycheque. All earnings are immediately consumed in buying “stuff’ or worse, debt is used to fuel the standard of living.
Middle Class: standard of living varies based on earnings and expenses. Some portion of earnings are directed towards either government or employer-based pensions based on a firm belief that retirement will be automatically taken care of if the prescribed formula is religiously followed. By and far, the most common type of debt carried is mortgage debt (more on than later). Usually pays the highest amount of taxes.
Rich: consciously make decisions to spend a lot less than they earn. Savings are directed towards investments. A large portion of income is through investments, rather than earnings. Usually pay little or no taxes.
In an earlier post, I mentioned about Boris Becker. Using this frame of reference, how would you classify him – poor, middle class or rich?
Develop your rich mindset
That first step in your journey to financial independence is to internalize the “rich mindset”. Simply speaking, it is training yourself to focus on what can money earn. Once you adopt this mindset, your core belief basically becomes acquiring a surplus of resources and then directing those resources towards investments that will continue to generate value on their own.
Let me make one point clear – if you feel for any reason you (or your significant other) cannot adopt the rich mindset, then stop right there. There is no point in proceeding further. Any of the information in the next few posts will be of little or no value to you. The reason is quite simple – if everyone in the household is not pulling in the same direction, then you are only spinning your tires in the mud.
That’s about it.
Good read.