Is personal finance more mindset or income? Many of you probably looked at this question and said, “Both!”. I agree that the right mentality with a large income is the perfect mix for a successful financial life. But let’s be honest, a “large” income for most people is subjective, especially when it’s so easy to compare yourself to others. I’m sure we’ve all looked at another person’s life and said, “If I made that much money then…”. I’m definitely guilty of it and struggle with it today if I’m being honest. I’ve learned that if you can’t live below your means today, adding more money to that equation is only going to make the mess bigger. As humans, it seems like it’s in our nature to consume everything we have which drives the need for more. This vicious cycle is why the obvious answer is mindset.
The Traits & Actions Of A Financial Independent Mindset
As I get older, I see more and more articles about athletes going broke. While others tend to ridicule these athletes I lean more towards empathy. Why? Because I know if I would have been given millions of dollars at their age I would have blown it. These athletes are then analyzed and ridiculed even more in the media for being incompetent. What if you had media dedicated to covering all the dumb financial stuff you did? There would be breaking news every week! And the same goes for me before I started living a debt free lifestyle. The only difference between them and me is a little bit of knowledge plus the traits it takes to reach financial independence – financial discipline and delayed gratification.
Financial Discipline comes down to two things:
- creating a budget AND living by that budget, and
- being able to tell yourself and others, “No”.
These two things will stop one of the most detrimental problems to your plan for financial independence from happening – lifestyle creep.
Most people that get a raise on the job or get a new job making more money almost immediately find a way to spend it. Whether it’s getting a new car or buying a new furniture set, people always find a way to spend that new money. These are a few examples of lifestyle creep. Instead of spending that money it could be used to go towards paying off debt or saving for retirement.
The ability to budget and say no will allow you to maintain your lifestyle as your income increases. The other option is to increase your lifestyle a little bit and then throw the rest towards your plan for financial independence. This doesn’t mean that you shouldn’t enjoy it when your income increases. By all means, go on a nice vacation. Go out to an expensive dinner with your significant other. My point is this: don’t raise your standard of living to that new income amount so that you have nothing to contribute to your future. There will come a day when you can’t work or you simply don’t want to anymore. You need to be able to support yourself when that day comes. Living this way is not always glamorous, but the delayed gratification does and will pay off.
Delayed gratification is one of the hardest areas for many people. There is a kid in every one of us that wants to show the world how well we’re doing financially. We will buy all these things, often times using credit, to impress people so they will think we’re successful. However, the truth is that some of us are only one missed paycheck away from the bank taking all that stuff back. We are nothing but glorified renters. You don’t really own anything when you purchase it through credit (I’m referring to homes and cars). Miss that car payment and you’ll see who really owns that car. Miss that mortgage payment and you’ll see how fast the owner wants the house back.
The problem people have with delayed gratification is that you have to wait and save up the money so you can actually buy what you want. Furthermore, since your income isn’t infinite you have to determine what purchases takes priority over the others. This is hard. Really hard. In this microwave culture, nobody wants to take their time to save up for things if they know they can have it today.
However, there is a perk to delayed gratification. Have you ever bought something and regretted it a few days or weeks later? When you have to save up and pay for things it takes time. Sometimes it can take months or years. The amount of effort and restraint that takes is hard, to say the least. Every time you save for that item you subconsciously ask yourself if it is actually worth saving for. You think about what you are passing up on by saving up for this one thing. You’re basically making the decision over and over again that this is something that you truly want and that you’re willing to give up on other things to get it. You’ve done this so many times that by the time you can finally afford to pay for it, you’re absolutely certain it’s what you want. There are no regrets! This is the perk to delayed gratification.
Where Does Income Come In?
Everything I’ve discussed in regards to mindset is focused around the idea of setting and maintaining a lifestyle below your means. So where does income come in? Increasing your income furthers the gap between your lifestyle and your means, which amplifies your ability to carry out the goals derived from your mindset – an absolutely beautiful cycle.
Let’s say today you make 40K per year and you’re able to live on 35K and invest the rest. Then, one day you get a new job making 50K per year. At this point you have options! You can choose to continue to live on 35K and invest 15K or you can choose to increase your lifestyle a little bit to 38K and invest 12K per year. Nerds, please don’t get bogged down with this example that did not include taxes, etc. I’m only trying to convey a concept here. Again, the idea is that if you have the correct mentality, an increase in income amplifies your plan for financial independence significantly.
The other side of income is that you need to have picked a career that allows you to support yourself and have enough left over to work towards financial independence. Picking a career is an important part of this journey. The ability to live below your means is incredibly difficult when you are barely bringing in enough to provide the basics. If this is the case, you should try to find ways to increase your income and/or cut your spending.