The Psychology of Wealth-Building
Today we will have an introduction to personal finances. I will take inspiration from a book I highly recommend, The Total Money Makeover by Dave Ramsey, a great start if you want to reflect on your psychology of money.
Personal finance is 80% behaviour and 20% knowledge
With behaviour, we take into account the emotional, the relational, the family history, the socioeconomic, and the spiritual. All the conditioning you have.
Have you ever heard the story of the three little pigs? One built his house out of straw, one out of twigs and one out of brick. The two who built the house quickly made fun of their brother because he was taking so much time and effort to make it right. But when the wind and rains came, the two short-term thinkers ended up moving with their brother, who was prepared to weather the storm.
The same analogy can be made for the American economic crisis of 2008.
What is the lesson here? The lesson is that your financial process and principles must work in good times and bad times. If your financial strategy works only when everything is going up, it’s a shitty financial strategy. I love the quote: "Every turkey can fly in a tornado"
Winning at money is 80 percent behaviour and 20 percent head knowledge. What to do isn't the problem, doing it is!
90% of solving a problem is realising there is one! I have a challenge for you: find a mirror. Look at the mirror. Take a deep look. What do you see? The person you see is the cause of your problems and the solution to your problems.
Whose fault is it if your finances are not in order? Family, partner, employer? Nope. You are the problem with your money. You are the king of your future. And even if the situation you find yourself into is not your fault, as Will Smith says, it is for damn sure your responsibility to fix it.
Once I came to realise that my money problems, worries, shortages began and ended with the person in the mirror, my life changed.
So, let me ask you: are you living in denial? Are you blaming someone else for your financial situation instead of taking responsibility?
To achieve greatness in finances you need focused intensity, life or death intensity. This is how you reset your money spending patterns. Once you look at the mirror, you must decide that things are going to change.
I know it’s hard to delay pleasure for a greater result. But that’s a sign of maturity, isn’t it? It is human nature to want something and want it now, but that is also a sign of immaturity. Being willing to delay pleasure for a greater result is a sign of maturity.
Another important thing to realise when you look in the mirror is that when you are physically fat, it is hard to be in denial. You can close your eyes, but if you open them, you see yourself. However when you are financially fat, you can fake it and look good for a while. People around you might think you are actually wealthy, for a while!
Here is a story from Zig Ziglar:
If you drop a frog into boiling water, it will sense the pain and immediately jump out. However, if you put a frog in room temperature water it will swim around happily. As you gradually turn the water up to boiling it will not sense the change. The frog is lured to his death by gradual change.
This is one of my favourite stories, because it teaches that we can lose our health, fitness, wealth, one day at a time.
What is the enemy of the best? Is it "the worst"? Nope. It is the “good enough”, the “just fine".
Change is painful. Few people have the courage to seek out change. Most people won't change until the pain of where they are exceeds the pain of change.
Dave Ramsey says that when it comes to money, we can be like the toddler in a soiled diaper. "I know it smells bad, but it's warm and it's mine".
If you keep doing the same things, you will keep getting the same results. You are where you are right now financially as a sum of the decisions you have made up to this point.
Breaking through your own denial is also tough due to your circumstances. You will make your family uncomfortable because you refuse to live like everyone else. The first time I told my grandma I was investing, she said I was crazy and that I would lose all my money!
Albert Einstein used to say that great spirits have often encountered violent opposition from weak minds.
There are two lies of money:
Risk denial, thinking total safety is possible
Shortcuts, easy wealth, looking for a magic key to get rich
First of all, security does not really exist. For instance, a secure job is a false security that simply does not exist because you could be fired at any point in time.
Secondly, there are no shortcuts in getting rich and there is necessary risk if you want to become rich. Do not believe the friend who told you they found a miraculous way of investing and became a millionaire in one month.
Easy money is one of the oldest myths in the human race. As my friend Anil told me, quick money for a long period of time is impossible! It is possible for luck in a short term like Dogecoin, but then you need to be able to work with the financial market.
Rich people do not have secrets. They do what's difficult. Living right is not complicated, it is difficult! Energy, knowledge and diligence are how wealth is built, not dumb luck! It was painful for me to learn this because there was a part of me who wanted to get rich quickly, like buying lottery tickets!
We live in a World where there is abundance and we might be tempted to think that everything will always be fine. That’s a lie! Things won't be ok unless you make them that way. Your dignity and your destiny are up to you. In Italy companies are obliged by law to set some money aside for your retirement, but if you ask me, Leaders do not leave things to chance. You are in charge of your retirement.
We need to become rich. Not rich in our bank account, rich in our mindset! What is the difference between broke and poor? As Dave Ramsey says, I have been broke in my life, but never poor. Poor is a state of mind.
As you raise your kids, raise them with an employee mindset, for instance giving them money when they read books. Teach them to allocate the money as save, spend and give! We will dive into rich thinking in another Episode.
The reason why very few people are incapable of managing their finances is because they live a reactive life. They only concentrate on the urgent! They live day by day.
When we work with Senior Leaders, we often discuss The Eisenhower Matrix. I am sure you have heard of it. The matrix is named after Dwight David Eisenhower, an American army general and statesman who served as the 34th President of the United States from 1953 to 1961.
The Matrix is also presented by Dr. Stephen Covey in his book “The 7 Habits of Highly Effective People”.
Dr. Covey says that effective People begin with the end in mind and divide tasks in 4 sectors:
Do the same with your tasks. Make a budget. Managing spending categories is a must to gain control.
I cannot stress enough the importance of tracking your expenses. It's easy to overspend if you don't have a clear boundary line. Use an app such as Money Lover, suggested by my friend Robert, to understand where your money goes.
John Maxwell said that a budget is people telling money where to go instead of wondering where it went. You have to make your money behave and a written plan is the way!
Earl Nightingale, motivational legend, said that most people spend more time picking out a suit or clothes than planning their careers or even their retirement.
If you are not able/willing to manage your finances, should you rely on an advisor? In America, there are debt management firms. It’s not that professionals and companies cannot help you, however I would discourage that because as we said personal finances is 80% behaviour and 20% head knowledge. If you rely on someone else, your habits will not change!
Think about this: you can't have someone lose weight for you, you have to exercise. Handling money is the same, you must change your behaviour! Turning your problems to someone else treats the symptom, the practicalities, but not the problem, which is your behaviour.
To wrap up, being in control of your personal finances is important. Make a decision today to become in control. A great proverb says “A good man leaves an inheritance to his children's children".
Change the way you manage money. Become a wealthy thinker, do not try to be normal because normal is often broke!
That’s what I have got for today’s article; if you liked this article please share it with someone you know and love, the only way we grow and impact more people is if you guys share it so I greatly greatly appreciate all of you who will do it.
Live with Passion, Matteo