The following is a guest post from Jon at Money Smart Guides. If you’re interested in submitting a guest post to Frugal Rules, consult our guest posting guidelines and contact us.
When it comes to money habits, the rich and poor have completely opposite views. These opposing views inherently affect their lives. While the poor tend to focus on today, the rich are more concerned with tomorrow. Note that for the purposes of this post, I am using the terms “rich” and “poor” to describe viewpoints on money and not on social class. You can have money while at the same time have a poor person’s view of money and vice versa.
Focusing on Tomorrow Rather Than Today
The rich for the most part, save their money. They max out their retirement plans and then save more money in taxable accounts. When shopping, they spend money when they perceive an item to be of good value. The poor on the other hand, might save some money in their retirement accounts, but for the most part they spend their money. They don’t necessarily look for good values; they focus more on the accumulation of things as a status symbol. Here, the rich focus on tomorrow, or the future. They want more out of life and are taking action to do so. The poor focus on today and buying things that will make them feel good or give the impression that they have money. They may want more out of life as well, but they focus on today instead.
The Issue with Focusing on Today
When the poor focus on today, and buy things they don’t need, they cost themselves money tomorrow. For every want the poor satisfy, they set themselves that much farther behind. On the other hand, for every dollar the rich save by not buying a want, they put themselves that much farther ahead because their money will compound and grow to an even larger amount. The poor can’t take advantage of compound growth because there is nothing there to compound upon.
An Example: Buying a Car
Buying a new car is a great example of this in real life. Put aside for the moment your feelings on whether or not you should ever buy a brand new car and just focus on the idea of the purchase.
The poor person will walk into a dealership and tell the salesman he is looking for a new car. The first thing the salesman asks is, “How much are you looking to spend for a monthly payment?” The poor person, without hesitation will give an amount. The salesman is now free to pick almost any vehicle on the lot. The overall cost of the vehicle doesn’t even matter. All that matters is getting a long enough loan so that they meet the customer’s monthly payment goal. This is evidenced by car dealerships now offering 72 and 96 month loans (that’s a 6 and 8 year loan respectively.)
I have a friend that falls into this category. The charade has been going on so long, he is underwater on his car. He traded-in his last car but he owed more than it was worth, so the dealer rolled what he owed into his new car payment. Now he is paying interest on his current car AND the car he no longer owns!
Now let’s look at the rich person buying the car. She walks into the dealership and might or might not have a model in mind. When the salesman asks, “How much are you looking at for a monthly payment?” the rich person balks. She isn’t interested in the monthly payment. She is interested in the overall cost of the vehicle. She wants to limit the overall price of the new vehicle, which will help limit the amount of interest she will pay as well.
By focusing on the overall cost of the vehicle, the rich person is looking at tomorrow, making sure that she has her money working for her. The poor person on the other hand, by looking at today is making sure that he has to work for his money.
You Can Change Your Mindset
When I graduated college, I had a hard time landing a full time job. I became depressed and started to focus on the now, the today. I ran up my credit cards, maxing out two of them. I opened a third for the low balance transfer rate, but ended up putting new charges on the old cards after transferring the balances.
If you look closely at that last paragraph you can see the fight that was going on. I was trying to change my mindset to think about tomorrow – I wanted a low interest balance transfer so that I could limit the interest I was going to pay. Unfortunately, the short-term instant gratification won out.
Eventually, I won the battle. I had my “ah-ha” moment when I realized that buying things was only making me feel better for a brief moment. The new item I bought gave me a temporary high but that quickly wore off when I saw my credit card debt.
Once I decided to change my views and began paying off my debt, my depression went away. I became motivated as I saw my balances decrease and I focused more and more on tomorrow and not today.
How to Change Your Mindset in order to Become Rich
Looking at tomorrow versus today is not an easy thing to do. This is why there are more poor people than there are rich. But you can change you mindset. Here are the steps to do so:
Stop and Think: Marketers are great at their jobs. They can get you to buy when you have no need. Heck, they can make you interested in something you initially had no interest in! By taking a moment to stop and think, you can learn to reason with yourself and make better decisions.
Ask Yourself Questions: Before I buy things, I ask myself “will buying this get me closer or further away from my ultimate goal?” In order for this to work, you need to know what your ultimate goal is. Mine is to become financially independent. Therefore, buying a new pair of pants for work because they are 50% off doesn’t make sense when I have eight pairs already. Sure they are half price, but they still cost 100% more than I need to spend.
Of course, this doesn’t mean you have to completely deprive yourself of buying anything because it doesn’t fit your long-term goal. This is where the next step comes into play.
Take a Break: If you’ve stopped and thought about it and asked yourself questions and you still want it, just leave the store. Take a week to let the air clear. In most cases, after that week, you won’t be thinking about the item any longer, which means you didn’t really need it in the first place.
If on the other hand you still want it, then you can decide if you will buy it or not. If you decide to buy it, don’t feel guilty, since you took the necessary steps. You’ll find that the majority of times, you won’t buy the item. For the other times, you can feel good knowing that you are being smart with your spending.
In order to take control of your financial life, you need to focus more on tomorrow as opposed to today. You need to think about how spending money affects your life in the long-term. It’s easy to get lost in the now and while it is important to live in the present and enjoy life, we can’t focus solely on the present and expect the future to take care of itself. It doesn’t work that way. We need to make an effort to focus on the future as much as we can while still being present. If you can accomplish this, then you will have taken control of your financial life.
Jon writes for MoneySmartGuides, a personal finance blog that helps educate people on personal finance so that they can reach their financial dreams. He focuses mainly on investing and paying off debt since those are the two of the most challenging personal finance topics we face.
Editor’s note: I LOVE Jon’s thoughts here. He’s spot on, in my opinion, in regards to how we view our money. I think you can tell a lot about a person through their view on money. Someone making $50,000 but is managing their money well is much more rich than the person making three times as much but throwing it all away.
Photo courtesy of: Svadifari