7 personal finance lessons for wealth building
Wondering what it takes to be prosperous and live an abundant life? It starts with the right mindset and habits. Here are 7 key personal finance lessons for wealth building.
For many, money is a nagging source of fear and frustration. Many people feel enslaved by money and struggle with the belief that they can’t be the person they want to be, or live the life they want to live, without it.
Usually, income generation is the main area that people focus on when it comes to wealth-building. However, though this is important, you have to move beyond the notion that the acquisition of more is the sole solution to your money woes.
The path to prosperity requires changing the way you think about money and replacing old belief systems with new ways of thinking and more effective habits. In this guide we share seven key personal finance lessons that will help you build wealth.
Personal finance lesson 1: understand what money is and is not
In his essay “How to Make Wealth,” venture capitalist Paul Graham makes an insightful distinction between money and wealth:
What Graham is getting at is that the dollar has no worth of its own. It is nothing more than a piece of paper that acts as a medium of exchange. Instead of linking your self worth to how many dollars you can accumulate, realize that nothing can be had in life without a cost — though that cost isn’t money but the value it stands for.
You can accomplish this by shifting your focus on wealth-building vs. money-making. Wealth comes by continuously creating things that are of high value to someone else and exchanging it for something that is of high value to you.
Instead of focusing on accumulating money, try to focus on ways to build wealth through value-adding activities. If you think of ways to use your skills to create valuable products or services, you can exchange them in return for the things you want or need.
This is not an easy mindset shift but it is a critical takeaway: your livelihood is not dependent on money but on the quality of your ideas.
Personal finance lesson 2: have a system for managing your money
If there is one area to master when it comes to money matters that’s to have a solid system in place for managing your money especially eliminating as many recurring bills as possible, automating payment of the ones that must remain and setting up a savings strategy. This is an effective step in tackling your money woes because of the powerful psychology behind it.
In the Paradox of Choice, author Barry Schwartz presents research that shows how having too many choices to make can be draining and even debilitating. Scaling back on the number of bills you have is a great way to simplify your finances because it cuts down on money-related tasks and decisions.
Moreover, automating bill payment and savings takes the tediousness out of money management so you don’t have to keep thinking about it.
Psychology Today discusses how negative projection, or assuming the worse about an unknown outcome, leads to unnecessary suffering. By automating your bills you eliminate anxiety by exerting full control over the process, then removing bills from your daily list of concerns once the process is set up.
Anticipation anxiety is particularly challenging for those who have a history of poverty or money problems (for instance, if you grew up in a low income household). Even if you don’t have a difficult financial history, you may dread going to the mailbox or cringe each time you get an invoice, which is undue stress that can be alleviated.
First, ask your payees to convert to digital vs. paper statements, if possible, so you stop getting anxious about getting invoices in the mail. Second, set up automatic bill pay so your invoices are paid automatically from your bank account without you having to think about it. Finally, start identifying and aggressively eliminating bills you simply did not need.
We can't stress the feeling of freedom this particular step will yield. Eliminating bill clutter and putting your savings on autopilot will work wonders on your emotional relationship with money, giving you the energy to tackle the more complex areas in your finances.
Personal finance lesson 3: get out of the scarcity mindset
Scarcity mindset is a term that was popularized by Princeton psychologist Sharif Sendhik and Harvard economist Mullainathan Eldar with their book “Scarcity: The New Science of Having Less and How It Defines Our Lives.”
In it they analyze the self-imposed burden we put on ourselves because of our limited thinking, and provide some insight into how we might better manage scarce resources and increase our happiness in the process.
Economics is the study of how people and societies make tradeoffs and prioritize goals in order to manage limited resources. The very essence of economics — and the dominating school of thought for many people — is the belief that there is only so much to go around.
However, economists consistently fail to predict the big events that shape our society (like major recessions) so, believe or not, they aren’t the most reliable resource for how to think about money or build wealth.
It’s one thing to be mindful of not exhausting your reserves, assets, and supplies — be they natural or manmade. It’s another thing to live in a state of perpetual worry that the only way to get yours is by taking away from someone else.
If you operate under the belief that everything in life is limited or never enough (be it money, time, or relationships) then your thoughts, decisions, and actions, will be driven by a fear of lack.
From divorce rates to rampant war, some of the most significant societal challenges we face is driven by this fear. In fact most of the recent financial crises (that economists weren't able to foresee) were also driven by fear. You can overcome this fear and establish a sense of security in two ways:
First, by recognizing that you actually do have an unlimited supply of resources. With proper use you have powerful internal tools like intelligence, resourcefulness, imagination, creativity, and drive, at your disposal anytime you need them.
Second, by being clear on what’s actually a need. Your basic needs have a concrete means of fulfillment (e.g. hungry, eat, full). However, your wants can be never-ending. Often, insatiable urges are driven by unchecked wants that create a misperception of having too little.
Of course, the reality is that we live in a world of haves and have nots and for many this presents a legitimate life or death situation. However for those of us who live in first-world Western societies, this debilitating mindset is quite unnecessary upon consideration (and appreciation) of the great wealth we already have and the abundance of possibilities we often overlook.
Personal finance lesson 4: stop social comparison and climbing
Social Comparison Theory, originally proposed by psychologist Leon Festinger in 1954, suggests that we feel bad when comparing ourselves to people better off than us and happier when we perceive ourselves to be better off relative to others.
The colloquial phrase for this is keeping up with the Joneses and it’s a major cause of debt and happiness. Comparing yourself to others not only prevents you from feeling content with the state that you are in (even when you are well-off), it also tends to lead to irrational money decisions and overspending that can put you in a financial strain.
A smart way to use Social Comparison Theory to your benefit, is to live modest and beneath your means. For instance, instead of getting a luxury apartment in the most expensive part of town as soon as you get a raise, you may choose to remain in your current neighborhood where your income goes very far relative to the local average.
It is well worth considering different ways this mental trick can be employed particularly as it pertains to your finances. Quartz’s article “The best strategies for self-assessment, according to Buddhist and Stoic philosophy,” is a useful resource.
In short, don’t make unrealistic self-assessments by upward comparison. Using this happiness hack will force you to appreciate the progress you’ve made in life and continue to prioritize what matters, instead of constantly trying to play catch up.
Personal finance lesson 5: distinguish money fears from money problems
In the quest to alleviate money problems don’t get confused about the battle you’re fighting. The key to clarity is to separate out irrational fears from actual problems. Sort out the difference between the problems and the fears. Once you have them properly bucketed come up with a distinct set of tactics to address them.
Money problems are real life threats (losing your job) that will have a detrimental impact on your financial state (not being able to pay rent) if you can't find a viable solution to it (getting a new job). Money fears are things that you continually tell yourself (I'm a failure because I don't make over $100,000 dollars) that are often untrue and only lead to a perpetual state of useless worrying.
Since money problems also add to money fears, it's important to address those first. Try to put yourself in a balanced financial state by tackling the things you should be worried about (like living below your means, getting rid of debt, setting up an emergency fund). Then move on to eliminating the self-deprecating thoughts that keep you from fully realizing your potential.
You may appreciate some of the insights garnered from the book "How to Worry Less About Money" by John Armstrong. It can act as a starting point for formulating your personal finance strategy. One of the many useful quotes Armstrong curates in his book is:
Virgil, an ancient Roman poet, is illustrating the key to establishing a healthy relationship with money: mindfulness. Virgil advises us to approach matters of money with great care and detail. It shouldn't be an afterthought but worthy of your utmost attention.
Worrying about money won’t get you far. It is only after developing a growth mindset, and converting that negative energy into a thoughtful process for understanding your financial state, that you will see progress.
Personal finance lesson 6: have a strategy for wealth building
An important lesson for wealth building is that you need to have a clear vision for where you want to be financially and a strategy in place for getting there. We’ve outlined three methods to accomplishing this:
BE SPECIFIC ABOUT WHAT YOU WANT TO EARN
If you want to build wealth you need to be as specific as possible about what you want to earn (and why) so you can organize all of your business or professional activities around that goal. Knowing the what and why not only keeps you focused but it serves as a strong emotional and motivational driver towards success.
Answering these two important questions for yourself, with as much detail as possible, will provide you with a higher goal to peg your efforts. It’ll also empower you with the raw data you need to make smart decisions about how you spend your resources.
If you are a professional your strategy may require a plan for rising in your organization so you can reach a certain income goal, whereas entrepreneurs may seek the launch or growth of a business. Regardless of the path, knowing what you want to earn and why precedes the how.
PAY CLOSE ATTENTION TO YOUR FINANCIALS
We’ve coached many professionals and entrepreneurs who don't have a clue where they stand financially — from both a business and personal perspective. Sometimes they don’t understand their cash flows and other times they haven’t projected where they want to be wealth-wise in the near future.
Neglecting your financial state typically leads to a whole host of personal finance issues such as feast and famine cycles where one month it seems like you are thriving and the next the coffers have completely dried and you’re scrambling to make ends meet.
It’s important to incorporate at least some basic accounting into your personal finance routine so you are aware of your financial health and can make adjustments for the better.
If you aren't good at accounting or don't want this to take up a disproportionate amount of time there’s still no excuse for not tracking your financials. There is no shortage of apps and services that make it easy to manage and monitor your financials.
Individuals can use a tool such as Mint, a popular online money management and budget tool. While businesses can employ a service such as Bench, a professional yet affordable bookkeeping company. Both help you keep a solid handle on your income and expenses and monitor your bottom line.
Master the art of creating wealth
The secret to rapid wealth creation is to serve others through the creation of ideas and solutions that meet needs, fulfill desires and solve problems people are willing to pay for. It doesn’t matter if you are an entrepreneur or work for someone else, a service mentality will make you invaluable to others and create high demand for your work.
Money and opportunity flow quickly and more easily to those who create something of value for others. For example, when you start a business your goal is to make something that someone else wants. Money then comes to you from your customer in exchange for what you created for them. This money allows you to go out and get what you want (i.e create wealth for yourself).
To make it even more clear: learn how to add value in your work (whatever your work is) and you’ll put yourself in a better position to earn more and build wealth as a result.
Personal finance lesson 7: balance pursuit of money with meaning
One of the greatest dilemmas in the quest for wealth is how to balance meaning with the pursuit of money. The question of whether money buys happiness does not have a definitive answer. Wealth, obviously, is not defined by money but richness of life. Though, there’s no denying that quality of life is largely determined by economic prosperity.
Our notoriously tumultuous relationship with money is often rooted in confusion around its role: the muddled lines between whether it is merely a means to an end or an end itself, and whether it has inherent value or is solely one of many mediums of exchange.
Moreover, our insatiable thirst for money is driven by all that it symbolizes — security, identity, liberty — yet propels us to make difficult tradeoffs that jeopardize the very lifestyle we claim we need money to obtain.
Businesses often prey on consumers' money anxieties and financial discontent by taking advantage of the fears, insecurities, unfulfilled desires, and far off aspirations to influence them to buy and consume products that provide an artificial and temporary sense of high status — and self.
They deliberately write stories and scripts that showcase a more fabulous, more glamorous, more luxurious life, and invite consumers to exchange money for the opportunity to live vicariously through the fantastical images they convey.
We’d be a fool to suggest that money doesn't play a critical role in your life. However, the remedy to your money challenges and the requisite for building lasting wealth is to gain clarity on what money is and isn’t and what it can and can’t do for you.