Introduction
Having created a budget, a method of tracking one’s income and expenses, it is now time to create the right mindset around money: the money mindset. In this short article I will guide you through psychological aspects related to money trying to get you on the path to true wealth or at least what I consider to be true wealth. Let’s get started!
1. Being Rich vs. Living like Rich
When people imagine being rich, having millions in the bank, they always think about what they would buy; what car, house, purse, shoes, ec. Very few think about the fact that they probably won’t have to work anymore, even fewer think about how much more time they will have to spend with their family, friends, or to invest in their personal projects, and virtually no one thinks that being really rich means that no one will tells us how we should use our time. Let’s do a thought experiment: if I say to a young person “tomorrow you will have 1’000’000 in your bank account and you can use that money as you wish, no restrictions” how likely is it that the next day there will be less than 1 million in his account and how likely is it that this person’s lifestyle will increase exponentially ? Very likely. How likely, on the other hand, is it that a person will have more than 1,000,000 the next day? And even more the next? Almost zero. That’s why so many lotto winners go bankrupt a few years after winning, because they are moved only by impulses they deem reasonable, forgetting rationality altogether. That million can give you a shot of adrenaline and serotonin every day for the next 3 years, making you live like a sheikh, or it can free you from any kind of obligation for life: many choose the first option. Perhaps out of ignorance? Perhaps out of an imbalance between rationality and reasonableness?
The true rich person then is not the one who gets carried away by the game of social status, where no one wins, nor is he the one who lives on impulses and seeks pleasure in material things because he has nothing else in life that can make him happy. The true rich is the one who rather then buying objects buys back time and freedom, saving but not depriving himself of what makes him happy, in order to have an even better future while living a life today, however, based on humility and not profligacy.
2. Rational vs. Reasonable
Acting rationally means acting to optimize one’s situation to the best of one’s ability, regardless of the psychological or mental factors. Simply put, it means doing whatever is necessary to improve one’s situation without regard to anything else. Usually those who are guided only by rational thinking are also called “cold” precisely because they do not give weight to the psychological or mental part of decision making.
Even though I am a scientist and therefore I prefer to calculate and have mathematical proof, I also consider reasonableness absolutely necessary in decision making. Reasonableness is used after rationality and is used to filter out those decisions that are perfectly rational but do not conform to our principles, ideas, or simply character. Simply put, the reasonable part is what distinguishes us from a machine. We will now look at examples of rationality vs. reasonableness applied to personal finance.
2.1. Reasonableness in Investing
Let us imagine a person who has never invested anything and decides to rely on a close friend, asking for advice on how and what to invest his savings. The friend simply repeats to this person his investment strategy that is perfect for him: after trying this strategy for a few months, this person has increasing anxiety and even struggles to fall asleep at night thinking about how much money he can lose overnight. The strategy suggested by the friend, even though it is completely rational and offers greater returns, it is not reasonable for this person because it does not allow him to live a peaceful life without being constantly at the mercy of his negative emotions about it. This is something that many times is not taken seriously and is the difference between rationality and reasonableness: a successful investment strategy absolutely must have both.
3. The Money Mindset
Having talked about the difference between pretending and being rich and the difference between rationality and reasonableness, we can now combine this into what I like to call the Money Mindset (or winning mindset). This mindset is very rare these days especially looking at the figures on debt (e.g., of credit cards) but it is also the most powerful one you can have because it will lead you in a couple of years to be much better off financially than your peers and much more comfortable and happier with what you own. What then does this mindset consist of ? The basic aspects are as follows:
- Complete indifference with respect to the social status game
- Impassivity with respect to ruthless marketing strategies
- Creating goals that are rational and reasonable
- Absolute constancy, especially in dark times, in pursuing one’s goals
- Helping others, because once others see your results, they will come and ask how you did it
- Don’t be afraid to decline offers that are not reasonable for you
If you can follow all these points, then you will be far ahead of the average person in this society and will succeed even in very ambitious goals such as financial freedom well before regular retirement.
Conclusion
In this article we have seen what the difference is between being and appearing rich, the difference between rationality and reasonableness, and how to combine it all in the Money Mindset. If there is one tool that is crucial and that you should be working on right now for the success of your financial (and other) goals, it is the Money Mindset. So I hope you enjoyed the article and see you in the next one, bye!
