If you want to become wealthy or retire early, the first step is to create a wealthy mindset. If you don’t get your head in the right place, even if you come into millions you’ll fritter it away. (Many lottery winners have experienced this.)
Your actions stem from your beliefs about money and prosperity. It is imperative that you shift your thinking to create a wealthy mindset.
Warren Buffett is widely considered to be one of the most successful investors of all time, with a net worth of over $100 billion dollars. He is known for his disciplined approach to investing, and his long-term focus on building wealth. He’s quoted as saying, “I always knew I was going to be rich. I don’t think I ever doubted it for a minute.” Buffett started investing at age 10 giving him an immediate jump on compounding his wealth. Most people don’t think about investing until their 30’s or later, not realizing the power of compound interest.
Buffett’s wealth mindset is characterized by his patience and long-term focus. He’s not interested in making quick gains. He focuses on investing in companies with strong fundamentals and a good management team for the long term.
He also believes in continuous learning and self-improvement. Buffett reads extensively and surrounds himself with successful people. Known for his frugality, he still lives in the same house he bought in 1958 and drives a modest car.
Warren Buffett’s wealthy mindset enabled him to build wealth over time through discipline, patience, and a long-term focus on investing in companies that have strong fundamentals such as Coca-Cola and Apple.
How do you know if you need a wealthy mindset makeover? If you are up to your eyeballs in credit card debt, that’s a sure sign you need a new outlook on money and savings. I’ve been there so I can vouch for the fact that a diehard spender can become a saver. And, a saver can become an investor. While it takes time to accumulate wealth, it takes no time to shift your perspective and change your mindset instantly! Here are a few tips to help you shift your thinking to a wealthy mindset.
Creating a wealthy mindset involves several steps:
Set clear financial goals and develop a plan to achieve them.
If you have a big, exciting goal, you’ll be super motivated to make it happen. When I was working at the bank and spending $15 a day on lunch and coffee, my colleague packed her lunch and brought a thermos of coffee to work. She was saving to buy a house. She had a goal and I didn’t. I saw her behavior as limiting and well, boring. I didn’t realize that I was limiting my financial growth by NOT saving for an apartment and instead frittering my money away on silly stuff.
If I could go back in time, I’d have packed a lunch, avoided credit card debt, and bought a flat! I didn’t think such small sums would make a difference, but if you save $15 a day, you’ll have $5,475 at the end of the year. (Not including interest and in those days, interest was 7% on savings accounts!)
Get money savvy.
Educate yourself on personal finance and investing, to gain knowledge and confidence in managing your money. One thing wealthy people have in common is financial literacy. They understand how to use leverage wisely. They know how to calculate risk and take sensible measures to mitigate as much risk as possible. Wealthy people understand how compound interest works and don’t invest in anything they don’t fully understand. And, if they aren’t financially savvy, they soon get taken advantage of by scams or dubious investment schemes.
Learn how easy it is to get scammed.
Smart people often get hoodwinked precisely because they think their smarts in their own field apply to finance and investing as well. How hard can it be, right? The problem is, you won’t see the next scam coming. Few people do.
Everyone thought Bernie Madoff was a genius until he nearly took down the entire financial system. Enron was a highly favored company until it turns out they cooked their books. And everyone thought Sam Bankman Fried of FTX was a great businessman and philanthropist until he got arrested for misuse of customers’ funds.
Be aware of your own limiting beliefs and biases when it comes to money, and work to overcome them.
If you feel financially strapped right now, it may be hard to imagine the opposite, but imagining is just the thing to do. Picture yourself living a rich and abundant life. What would that look like? Would you have a house cleaner to clean your house every week? Would you live near the sea? Eat only organic foods? Have a weekly massage? A personal trainer? A life coach? What does the good life mean to you?
Shift your focus from short-term to long-term.
Don’t know where to start saving? You can’t go wrong getting some I-bonds from the US Treasury at treasurydirect.gov.
Focus on gratitude and being content with what you have, while also striving to improve your financial situation. A simple way to increase your gratitude is to send a thank you note every day.
Manage your emotions and avoid impulsive financial decisions, gambling, and get-rich-quick schemes.
I was a shopaholic and spent my way into huge debt in my twenties. While I still enjoy shopping to this day, I never spend more than I can easily pay off each month so I avoid getting into credit card debt.
If your shopping or other habits are costing you financially this could derail even the best financial plan. It is well worth getting your personal and emotional needs fulfilled so you don’t waste money trying to satisfy them with shopping, gambling, or other addictive behaviors. Start by identifying your top four personal and emotional needs with the free Emotional Index Quiz.
Avoid paying fees as much as possible for money management.
While a 1% fee looks tiny and sounds perfectly reasonable for qualified financial advice, you may not realize that you are reducing your returns as well as effectively handing over more than 25% of your investment returns to your advisor! I know that sounds impossible, but it’s true because of the 4% Rule.
You must avoid paying fees if you want to retire early. Instead, when you need financial advice, I highly recommend getting a fee-only, fiduciary financial advisor who charges by the hour or has a set fee and takes no commissions for anything she recommends.
This is actually a really big deal and just one example of how seemingly insignificant sums can make a massive difference to your overall wealth. Most people don’t realize this and pay the fees, unaware that they’re effectively parting with a huge chunk of their potential income. Look for low-cost funds or ETFs such as Vanguard or Fidelity. This is one time when paying more for something doesn’t give you a better service!
Build multiple streams of income.
This is so that you’re not relying solely on a single source of income. Think of all those employees at Enron who invested their retirement funds in the company stock only to find out it was all a fraud and had their life savings completely wiped out.
Find an easy way to keep track of your expenses.
Most financial planners advise you to be disciplined with your money, by creating a budget and sticking to it, and avoiding unnecessary expenses. I don’t like budgeting so instead created a spending plan and figured out how much I could spend every month. Much more fun! There are great apps and online services such as the Plum app (withplum.com in the UK) and Mint.com and PersonalCapital.com that make keeping track of your money and investments a snap.
Keep learning and growing, both personally and professionally, to increase your earning potential.
Invest in your skills and develop your knowledge so that you can earn a higher income and increase your savings rate.
Be open to new opportunities and take advantage of them when they arise.
If a new and better job offer opens up but it requires you to move to a different state or country, would you take it? Some opportunities require a willingness to be flexible or do something difficult that others would decline, such as traveling or living in a foreign country or moving across the country. Knowing when you should take such a move or not could make a huge difference to your career.
Maintain a positive attitude.
This will help you to stay motivated, even during difficult times.
Be strategic and smart with your money by looking for ways to increase your wealth and reduce your debt.
A good strategy can make all the difference in creating a wealthy mindset. For example, you might decide to buy a duplex for your starter home and rent out one unit and live in the other. Then, as your career progresses and your equity increases, you could buy a family home in a nice area and rent out both units in the duplex for income. That could be a clever strategy for building rental income as well as property equity.
Be clever about using debt wisely by getting a 15 or 30-year mortgage that enables you to invest in stocks and shares, and take advantage of the power of compounding and the power of leverage. Get started investing as soon as possible as opposed to procrastinating. Automatically invest every month to take advantage of the strategy of dollar-cost-averaging. Use a system such as Allocate Smartly to make investing safer and easier.
Seek out mentorship or advice from successful individuals who have already achieved financial success.
I also recommend booking an appointment with a fee-only fiduciary financial advisor or planner for advice on how much insurance you should have, as well as creating a solid financial plan. Surround yourself with positive role models who have achieved financial success and you’ll get ideas and advice that can take your wealth to another level.
Invest in yourself and your personal development.
This can be done through education, training, or personal growth activities. This will help increase your earning potential and improve your ability to manage your money effectively. As T. Harv Eker, a popular self-help author and motivational speaker says:
“Your level of success will rarely exceed your level of personal development, because success is something you attract by the person you become.”
Focus on raising your savings rate and investing a chunk portion of your income, rather than just trying to increase your income.
Many people believe that the key to becoming wealthy is to make more money. I know this is how I felt when I worked at the bank. I was always banking on my next raise or promotion to solve my money problems. Funny enough, it was just never enough as I’d invariably spend the increase! This is another shift needed to get to a wealthy mindset.
Research has shown that people who earn high incomes but also spend a lot tend to be less wealthy than those who earn less but save and invest more. Yes, earning a higher salary makes it easier to become financially free faster, but only if you have a high savings rate.
By focusing on increasing your savings rate and investing a hefty portion of your income (20 to 70%), you can build wealth over time, even if your income is not particularly high. This strategy runs counter to the common belief that the more money you make, the wealthier you will become.
Don’t be afraid to take calculated risks, as long as you have done your research and have a solid plan.
I’d suggest running your plan past your financial mentor just to make sure you’ve thought through all the ways it could go wrong. Sometimes, taking a risk can lead to greater returns and growth, rather than settling for small gains. This is not the same as gambling!
Take the long view.
Focus on the long-term, rather than getting caught up in short-term fluctuations in the market or your financial situation. If you need the money in five years, you shouldn’t be invested in the stock market as that requires a longer time frame.
If you are looking for immediate results you can get caught up in get-rich-quick schemes and lose a lot of money. Remember, if it sounds too good to be true, it probably is.
The reason so few people are wealthy is because building wealth is a marathon, not a sprint. It requires patience, consistency, and discipline for many years.
Be patient, persistent, and consistent in your efforts to build wealth.
It can take time to build wealth, but with a clear plan and a wealthy mindset, you can achieve financial freedom. This can be done by increasing your savings rate to 70% of your income. Not an easy task, but some people manage to do it! It helps if you are a dual-income couple earning average or better than average salaries.
Lastly, keep your priorities in order.
Building wealth is important, but it isn’t everything. Make sure you enjoy the journey. Don’t sacrifice your health or friendships along the way. The longest-running research study on happiness reveals that relationships are far more important for happiness than money.