Editor’s note: Tonight The Money Principle presents a guest article by Bob Richards: a rich guy and publisher of The Retirement Income Blog. There Bob discusses and provides information on all matters pertaining to retirement. Oh, and he doesn’t try to convince you that if you failed to start a retirement account when you were twelve you’ve really had it and there is no way to pull back. In his guest article for TMP Bob argues that if one wishes to become wealthy they ought to think like a rich person and discussed five differences between rich and poor people. These are very intersting, as well!
Rich people are different than poor people and it’s not a matter of how much money each has. Rich people think differently. Please notice the causality: wealthy people don’t think differently because they’re rich; they’re rich because they think differently. Let me offer a couple of examples.
The National Endowment for Financial Education cites research estimating that 70 percent of people who suddenly receive a large sum of money (e.g. lottery winners) will lose it within a few years. Why do they lose this money? These riches-to-rags subjects focus on spending, the focus of poor people, rather than on investing, the focus of rich people. A counter-example of a poor person that becomes rich would be Chris Gardner, featured in the movie the pursuit of happiness. Chris was homeless, living in a subway bathroom and the movie shows how his thinking was the only thing that brought him from rags to riches.
Thoughts precede actions and actions precede results. People are often rich or poor based on their thoughts.
My economics 101 professor used to say that the difference between rich people and poor people is their time horizon. Poor people’s time horizon is two weeks, rich people have the time horizon of 20 years. I think this is one true difference in their thinking.
Another difference is the previously mentioned issue of spending versus investing. My main business is selling to small business owners. I can always tell which ones will remain poor when it comes time to make the investment and they say “I can’t spend that money right now.” The fact that these business owners use the word spend, rather than the more accurate word invest, immediately tells me that they have a poor person’s mentality. Rich people understand that investing is putting money to work to generate more money; a poor person simply doesn’t think about investing and thinks about money for buying stuff.
Another difference between rich and poor is that poor people, when they do realize that investing might be a good idea, seek to buy the right “things.” The poor person asks,” what’s a good investment right now?” The rich person asks, “What’s a good method or plan for investing my money over time?” A rich person understands that services and intellectual property have value. Poor people usually do not and focus on putting money into physical or tangible things. I am always amused by the drug dealer who buys his Cadillac or Mercedes with cash yet still lives in the ghetto. Rather than attend to his quality of life, i.e. the environment in which he lives, he uses his cash to buy things.
Related to the above is a poor person’s concern with status. They want to drive a nice car or have some cool stuff because among their poor friends, cool stuff equals status. I am shocked by the number of poor people I see with the latest iPhone. The phone itself is expensive as is the monthly data and voice plan. Rich people don’t have a concern with status. I would encourage you to read Tom Stanley’s book “The Millionaire Next Door.” He describes people who accumulate significant wealth as typically living in middle-class neighborhoods, driving an older car and not wearing the latest fashions. You know people like this. Here is a picture of Warren Buffett’s house. He has apparently added to it over the years so it is almost 6000 ft.². Zillow estimates the value at $720,000. Why would a guy who is typically the first, second or third richest man in the world live in such a modest house that he purchased in 1958? Because he is a typical rich guy and does not need to have a fancy mansion.
Here’s a picture of Sam Walton’s 1979 Ford F-150 pickup (the founder of Walmart ). What, no Bentley? In 1985, Forbes magazine declared Mr. Walton the wealthiest person in America, a distinction he often said he hated. “All that hullabaloo about somebody’s net worth is just stupid, and it’s made my life a lot more complex and difficult,” he said.
You choose your thoughts. If you want to get rich, think like a rich person.