Most people don’t really understand money. There are two things to grasp before you can ever become wealthy. Those two things are illustrated in this top five list of things that explain why people are broke.
Broke Reason #1: Money Is Not Wealth
Having money is not the same as having wealth. You can have a million dollars in your bank account, but if you’re a million and one dollars in debt, you’re still broke. Just because you have money doesn’t necessarily mean you are really rich. Money is a pathway to wealth, but is not wealth itself.
Broke Reason #2: Assets vs. Investments
Assets are things that give you the illusion of wealth, but often just create a facade of wealth. Owning a fancy new car is great, but it is not an investment it’s a liability. It loses money over time, costs you money over time, and is nothing more than a new debt even if you own it outright. One of the best lessons I learned from Thomas Stanley’s Millionaire Next Door is that millionaires spend their money on investments, not assets.
Broke Reason #3: Savings vs. Investments
Having a relatively large savings account or a large amount of money in a checking or money market account is not an investment. It’s important to have cash on hand, of course, in case something happens, but if all of your “wealth” is stored as money in the bank, you are wasting one of your best wealth creation tools. The difference between savings and investments is the principle of wealth building.
Now, I am not saying that you shouldn’t find a good bank for your short-term cash needs. I am just saying that you need to make sure that you are not keeping too much in savings to the exclusion of your investment portfolios. When I am looking for a bank, I often don’t care about the interest rates, I look for great online banking features because that is what is most important to me. Some of the bank websites that I like are Ally Bank and CIT Bank.
Broke Reason #4: Lack of Long Term Thinking
Having a “good job” is a great thing, of course, but if your good job means you think about the next paycheck or the next month’s income, you suffer from a lack of long-term thinking. Your income (job or business) should be thought of in terms of quarters and annuals. Rather than thinking about the next two weeks or the next month, a wealthy person thinks about the next three months, six months and the next year.
Focus on making year over year increases in your income. This might be through the creation of a side business or by simply asking for a promotion.
Broke Reason #5: Obsessing Over Money
If you obsess over where your next income is coming from, how much money you do or don’t have, or are always thinking about how much you can make by doing something, you are not thinking in terms of wealth. Again, money is only a pathway to wealth, but it is not wealth itself.
What is wealth?
Now that you know what blocks your way to becoming wealthy, let’s define wealth and then you’ll understand the critical change in thinking that has to happen if you’re going to ever become wealthy. Since wealth is not money, what is it? Wealth is the ability to not think about money and instead to think about incomes in a broader sense.
For instance, while a car is rarely an investment, property, dividends, and education are. Investments are those things which pay back over and above their cost. If you purchase a second home as a rental and it can pay its own mortgage and expenses through rent over the next fifteen years, you’ve made an investment. What you’ve done is invested some money now so that fifteen years from now, you own property that didn’t cost you much at all. The same can be said for stocks that pay dividends, gold or silver, or an education. All of these things can pay you back over time some faster than others.
Wealth is simply getting more for less over time. Today’s 50-hour work week should become tomorrow’s 40-hour week which becomes a 30-hour week and so on.. all without lowering income.
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