“There is something about you. Something you carry, something made of gold… but far more PRECIOUS…” – Smaug (J.R.R Tolkien)
In case you haven’t guessed, I think… alot. I don’t always have the time on my hands but that doesn’t prevent me from always wondering “why.” Recently as I was making a rather large purchase, I thought to myself “ugh I don’t want to see my savings account drop like that.” This mere thought got me thinking: our money psychology defines so much of our financial future. Yet how we view money, spend it, and rationalize our purchases mostly come from the environment we live in. In today’s blog I’m going to discuss three types of money mindsets and what they mean to your financial future:
The Hoarder – If there’s one thing I’m really good at it’s money hoarding. Depositing paycheck after paycheck and watching my balance accrue makes me well… happy! But about a year ago I found this actually isn’t the best psychology to have. I remember I wanted to get into real estate investing, the problem being, houses cost money. So when it came time to fork over the money for the down payment on my first house, I was feeling financially stressed. What I didn’t realize is that hoarding money without investing won’t get you as far as you might think. Think about it, even if you spent years upon years saving up money, if the money isn’t growing it won’t last. The game is passive income or the notion of making money while you sleep. Whether it’s investments such as Index Funds, or even buying a piece of cash flowing real estate; it’s really important to invest your money. The growth and dividends is what will keep you going even when you might not be able to work anymore.
The Risk Taker – On the opposite end of the spectrum of Hoarding is the Risk Taker. The Risk Taker likes to take their chance on those risky investments and see if they win; as the payoff will be huge! In my investment career I’ve been in this mindset as well. When I first started investing in the stock market I was really into penny stocks and other high risk investments; you could even argue my first investment property was risky due to the amount of repairs it needed. So what defines this psychology? I’ve come to the conclusion that the amount of risk you are willing to hold relates back to mostly your age and where you are in life. It honestly makes sense for younger people to lean towards riskier investments, because if the investment goes south they still have time to recoup their losses and move on. A stock portfolio of a 25 and 60 year old will just not look even close to the same. The 60 year old, hopefully getting ready for retirement, will have much more conservative investments such as bonds, CD’s, etc… Remember it’s ok to take risks on investments, but really weigh your risks carefully; if it flops do you have enough time to come back from it?
The Over Extender – When it comes to money I believe most people fall into the Over Extender mindset. In this specific mindset our upbringing defines how we view money and what we spend it on. There are many people who view a car or even a single family home that you live in as an investment. To me, an investment is something that makes you money. A car payment or mortgage that you physically pay with your hard earned money isn’t something that I would consider an investment but rather a liability. Do homes appreciate in value? Of course they do; but is the money you get back from appreciation going to be the same amount of money that you spent paying off the mortgage for 30 years? Maybe, maybe not! It depends on the investment. When in the Over Extender mindset it’s important to realize your specific goals. If you want to break this mindset or cycle, it’s important to adopt the Hoarder Mindset. Start saving and then any money that would have gone towards debt or liabilities pour into cash producing investments. By taking this path it will be extremely hard to not become wealthy.
Conclusion – What mindset do you have when it comes to money? What kind of assets do you hope to invest in? It’s important to mention no matter what psychology you have towards money always strive towards your financial goals as they are more than attainable! Let us know what you think in the comments below!