Money & the psychology of money
“The fight is won or lost far away from witnesses – behind the lines, in the gym, and out there on the road, long before I dance under those lights.”
Let us think about the ideas of “having too much money”; “having too little money”; or having “just enough”. Who has too much, who has too little, and who has enough? Which bracket should use a budget and which can live without a budget? Where would you like to be and why? Most people would obviously choose “the middle” way.
In their book, “Scarcity: Why Having Too Little Means So Much“, authors Mullainathan and Shafir argue that when humans are chronically underfed, have no money, or even lack time, that their performance suffers because all the mind can focus on is filling these needs. This scarcity mindset contributes to the poor staying poor, to dieters dreaming about binge eating, and to time-starved executives becoming less productive.
As outrageous as it may sound, scarcity mindset may not necessarily correspond to real absence of resources. Even very rich people can display the scarcity mindset. In another book, The Millionaire Next Door, authors Drs Stanly and Danko interviewed millionaires who displayed both scarcity mindsets and abundance mindsets. The lopsidedness of it is that those with a scarcity mindset displayed high spending characteristics, fueled by their fear of not having resources, while those with the abundance mindset focused on building wealth.
So, a person with a scarcity mindset is seen, among other characteristics, by their spending habits. Every time money comes in, they want to spend it. They are hungry for resources, not for money. They will never have enough money because they are always spending it, regardless of how much it is. I call this “being uncomfortable in the presence of cash”. You are so uncomfortable with money that you would rather spend it.
The wealth builders in The Millionaire Next Door, practiced strict financial discipline. They lived on a budget in spite of the amount of wealth that they earned. They allocated time to thinking and planning their investments. They taught their children about moderation and investing for the future. This is what helped them to build very high net worth.
On the other hand, the millionaires who focused on lifestyle did not run their lives on a budget, did not put any significant amount of time into planning their investments, and their children never had opportunity to learn how to create wealth. So, a person with a scarcity mindset will raise children with a scarcity mindset. These are the children that often run through their inheritances very quickly, and they go back to lack. A scarcity mindset is a mindset that does not know or learn how to grow wealth
The authors point out that high income earners often fall prey to the idea that they do not need to live on a budget. They are very often targets of sales people selling high priced items. They may drive the latest model cars or live in plush neighborhoods, but they have fears of losing their jobs because essentially, they live on all they earn. If their earnings should stop, their lifestyles would crumble.
There is no replacement for putting time aside to plan your finances regardless of how much you earn. In order to develop the abundance mindset, the first step is to work with a plan. You must draw a clear financial plan. You must plan your investments.You must plan your spending. You must plan your savings. You must plan your protection. You must plan your emergencies. You must plan your growth path. You must plan your retirement.
Like Muhammad Ali said, the fight is won far away from witnesses. Stop dancing in the light if you know you have not spent enough time in the gym. Your results are inevitable.
Nelson Letshwene is the managing director of Moedi Learning Technologies, a company that teaches personal finance education. He is the author of several books on personal finance, including Your Longing is Your Calling, available on amazon’s kindle: http://www.amazon.com/dp/B00NLC6J22