deas are a funny thing. People today are bombarded with sensory overload – the online world means we have access to almost any information at our fingertips. Social media means we’re privy to the lives of people we know and even people we don’t.
We use this and other information from our real and virtual lives to form ideas about how things work, including money and wealth.
The scary thing is, some of these ideas are dead wrong. And yet…they remain widely believed. These ideas influence how we think about wealth and how we think about our own financial standing, and that can be a dangerous thing.
Here are two ideas about money you need to leave behind.
It’s all about how much you earn
This is probably the most widely believed lie about money and personal finance.
People think that when it comes to money, it’s all about how much you make. The people earning the highest salaries are the ones in the best financial positions. These are the people who have the most savings, the least debt, and are just generally “good with money”.
Why it’s wrong
It’s true that having more money means you have more choices when it comes to managing it. It does not, however, mean that you’re going to make the right choices.
When it comes to financial freedom, it’s all about how much you spend relative to how much you earn.
A person who earns $80,000 a year and spends all of it is not better off than the person earning $40,000 a year who spends only two thirds. The second guy earns a relatively modest income but has savings. The first guy earns a more attractive salary but has nothing to show for it.
A third guy, earning a whopping $150,000 a year might be the worst off of the bunch if he’s in debt!
High-value possessions = wealth
Another pervasive idea in our society’s psychology is that people who have high-value items are wealthy.
You know what I’m talking about. People see a large house, an expensive car, or designer clothes and assume that the people who own them are successful.
Why it’s wrong
This idea is wrong (or might be wrong) for a couple of reasons.
The first is that people buy things they can’t afford all the time.
It’s relatively easy to get approved for a car loan. So your neighbor might drive a $60,000 car, but that doesn’t mean he paid cash for it. For all you know, he has a hefty car payment hanging over his head.
Meanwhile, the woman at work driving back and forth in the twelve-year-old beater might be debt free and have a couple of hundred thousand in savings.
People who take on debt to finance expensive luxury items they don’t really need are not usually wealthy. Wealthy people typically get that way by being smart with their money, and borrowing for items you can’t actually afford is the opposite of smart.
The second reason it’s wrong to assume that high-value possessions are a symbol of wealth is that wealthy people live below their means.
Even if you earn a lot of money, if you spend it all on big houses, expensive cars, and fancy clothes, then you don’t have any left over to save.
If you don’t have anything leftover to save (or, more specifically, invest), then you’ll never grow your money. You’ll always be reliant on that high salary to fund your lifestyle, and you’ll never have financial independence.
Working in banking, I saw so many people who made very healthy incomes stretching themselves too thin. They would borrow every cent they possibly could so they could buy the $500,000 house and the brand new SUV. It all seemed very exciting for the first few months, until they realized they were stuck with those payments. That meant they had very little cash flow left for other financial goals like saving for the future and you know…enjoying their lives.
Occasionally, I also saw people in low-key clothes, driving regular cars, living in modest homes that had a million or two in investments.
Bottom line, having a bunch of expensive stuff doesn’t make you wealthy – spending less than you earn does.
When it comes to money, it’s not how much you make, per se, that makes you wealthy. And it’s not how expensive your house or car is either. The sooner you ditch those ideas, the better.
Embrace this idea instead: the key to financial well-being is to consistently spend less than you earn.