WHAT’S THE DIFFERENCE BETWEEN BEING RICH AND BEING WEALTHY? (READ ABOUT IT NOW AND IN THE PSYCHOLOGY OF MONEY)
Editor’s Note: This is the first of a few blogs we’ll share throughout the year, highlighting wealth-building principles from the book, The Psychology of Money. A powerful read, we highly recommend it.
A big part of our work at Alia is empowering people to pursue their financial possibilities.
More than lip service, our positioning, Possibilities. Made Possible, is the air we breathe.
Building wealth, after all, is part science, part psychology—acknowledging and dealing with the most inner parts of ourselves, the ability to be self-disciplined, delay gratification, not want what others have just because they have it and understand that to live is to be able to thrive amid change.
The Psychology of Money is an easy yet insightful read about “timeless lessons on wealth, greed and happiness.” It’s a take-it-to-heart book that goes into detail about these topics and more. Sometimes it’s a gut punch, always an eye-opener.
In it, award-winning author Morgan Housel shares 19 short stories and concepts about why we make the choices that we do with money. It also explores the psychological traits that carry us to the finish line to reach our financial goals.
TODAY, LET’S TALK ABOUT TWO THAT WE TOUCH ON DURING CONVERSATIONS WITH OUR CLIENTS
The first is this …
No One’s Crazy! (chapter 1)
Really? Yes, even with their money.
That’s because each of us has our own unique experience with and relationship to the larger world. Our world perspective drives our decisions, both deliberately and unknowingly, about relationships, work, education, family and, of course, money.
An example Housel gives is the person who grew up in poverty thinking very differently about money as an adult than the person who was given everything they wanted financially.
What primarily drives our decisions about money are our personal experiences, upbringing and present-day views.
“Every financial decision a person makes, makes sense to them in that moment and checks the boxes they need to check. They tell themselves a story about what they’re doing and why they’re doing it, and that story has been shaped by their own unique experiences.”
—Morgan Housel, The Psychology of Money
I relate this personal-experience philosophy to my clients when they ask if they’re where they “should be” relative to others. “That depends,” or something similar, is how I usually respond, because it’s relative to your specific savings goals and spending goals, individually or as a couple, not compared to everyone else.
And the financial decisions you’ve made up to this point and moving ahead certainly aren’t crazy. They’re informed by a closely held belief about the world and how money enables you to live in it.
Second is this…
Wealth Is What You Don’t See (chapter 9)
Simply put, it’s not who earns more; it’s who saves more.
“The only way to be wealthy is to not spend the money that you do have. It’s not just the only way to accumulate wealth; it’s the very definition of wealth.”
—Morgan Housel, The Psychology of Money
In this chapter, Housel makes the crucial distinction between being wealthy versus being rich. More than semantics, he says, not knowing the difference between the two is a source of countless poor money decisions.
How are they different?
Being rich is about having a high income or a lot of money right now.
Being wealthy is about having a financial “stable,” of resources, including income-generating assets like real estate and stocks, that could provide long-term financial security. Wealth, Housel says, is hidden; it’s income not spent.
Being rich is about today, immediate gratification.
Being wealthy is about tomorrow, delaying gratification.
Ronald Read, a Vermont janitor and gas station attendant who amassed an $8 million fortune before his death in 2014, got it.
Known around town for his frugality, including wearing coats with safety pins to keep the fabric together, Read also had the discipline to hold onto his stocks for years, sometimes decades, a “long-haul” strategy espoused by billionaire investor Warren Buffett.
TIP: Check out Alia’s complimentary financial literacy “course” for more of Warren Buffett’s investing wisdom.
“Personal savings and frugality—finance’s conservation and efficiency—are parts of the money equation that are more in your control and have a 100% chance of being as effective in the future as they are today. … More importantly, the value of wealth is relative to what you need.”
—Morgan Housel, The Psychology of Money
I love to share Read’s life example, especially with my younger clients. Wealth building/preservation is what we work toward with every one of them—all of our clients, in fact.
How Can We Help You?
This book is definitely a great start but to delve deeper, contact us to learn more about making a plan and building wealth to achieve your goals, on your timeline.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
