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What is a ‘wealth’ mindset?

The Richest Man in Babylon is a small book that sets out a nice narrative showing people how to build and protect wealth. There are two overlapping themes in the book “Seven Cures for a Lean Purse” and “Five laws of gold’. It is an old classic by George S. Clason from 1926 that helps to cement that idea that wealth should be grown from the inside first. We need to develop ourselves so that we become ‘worthy’ of the wealth we ultimately receive. The two themes can be summarised as the below.

  1. Pay yourself first. Save at least 10% of our income. No matter how small that 10% is in dollars and cents for you, no matter how hard it is, it is a great habit to save that 10%. Set up an automated payment to a different bank than you normally use. For many people, 10% may seem too much. If so, start with 3% or 5%. Build up to the 10% but start putting money away regularly. Remember changing our behaviours is a great place to start.

There are two reasons. First, for that ‘rainy day’ event (your car breaks down, COVID-19 hits and lock-down knocks your income sideways). The other reason is to build up a ‘war chest’ for the good opportunities that will start coming your way. It is very difficult to make use of the situations that could increase your investment, if you don’t have the money set aside to start with.

Why pay yourself first? Because most people pay all their expenses first and then try to save what is left. Most people (over 80% by some accounts) spend more than they earn, and so never save anything. Taking money for yourself first is a subtle shift in your behaviour. It is also a clear indication that you are taking control over your money.

  1. Live within your means. Spend on the necessities, yes. Also allocate some for your own pleasure. Our “monkey” brains need some reward every now and then, to keep us on track. The challenge is to do all this without spending more than 90% of your earnings (remember that you are paying you the first 10%).

Take a good look at your current spending habits. All they all ‘necessities’? If you are not within your 90%, what do you need to let go of right now? Most of the time, whatever you do without now you will not miss in the future anyway. Besides, by creating the correct habits now, your future financial position be more likely to support different purchase choices. Pain now, for gain in the future.

  1. Put your money to work. We’ve mentioned compound interest in other articles. Putting your money to work is using the power of the compound interest effect to grow your money. Your money works for you by growing with compound interest. This means though that you need to think about where you are investing your money. The returns that you make should be reinvested so that they can grow further. There is a difference between a term deposit bank account and a managed fund. Learn or ask a professional to explain the differences.
  2. Keep your money safe. Invest and work in what you know. Avoid get-rich-quick schemes and speculation. Overnight successes take at least ten years to come to realisation. If you are not familiar with the business you are investing in, you may have trouble down the road. If in doubt, use skilled and professional help.
  3. Be a homeowner. Now I am a little cautious of this one. For many, the idea of home ownership is getting further and further out of reach. That said, if you are paying a large portion of your earnings on rent, then you may as well pay a mortgage so that you create your own asset. It’s a tough ask in the current property market. However, by employing the previous steps, opportunities will present themselves. One thing that home ownership does is drive people into a form of forced savings, albeit over 30-odd years.
  4. Insure your future income. We have covered the need for personal insurance in other articles. Be prepared for the unexpected. Something will come up, no one is immune to unexpected financial mishaps. If your income stopped tomorrow, how long could the family survive? Protect your income. This is a foundational principle in personal finance.
  5. Improve your skills to earn more. Invest in yourself. I’ve heard it said that you should invest 10% of your earnings into your own education, development and growth. Again, many people will be unable to do that. But think for a moment if you did upskill yourself, how might that improve your earning potential? Maybe you could develop yourself in your chosen career, or a new Maybe you want to learn more about investing and personal finance. Maybe you don’t understand much about KiwiSaver. Do you think it might make a difference if you knew more? For sure it would.

At the end of The Richest Man in Babylon, there is a comment about spending less or earning more. My experience is that earning more did not solve my problem of poor money behaviours. If you don’t learn the basics of how to control your spending, live within your means, and invest wisely, then earning more income will do you no good. You will just adjust your desires to match your new, higher income and still be stuck in the pay cheque-to-pay cheque cycle. 

Make a change. You may surprise yourself.

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