Three Ways To Think About Money

How Your Money Mindset Will Very Likely Influence Your Financial Outcomes

Has it ever occurred to you that money has a mindset? Or maybe better said, the way you look at money—your mindset—could really influence what happens with your money. My goal, when working with clients, is to help them achieve complete financial independence so they never have to worry about money again. But I have to be honest about something. A person’s money mindset is probably the number one factor that will determine their financial outcomes.

A money mindset is much bigger than how you?think?about money, the?goals?you’ve set or even the?disciplines?you’ve adopted to grow your wealth.?A money mindset is how you?feel?about money?and how your life experiences, both positive and negative, have shaped those feelings. After serving hundreds of affluent families for more than 20 years, I’ve come to recognize three distinct money mindsets. I’ll bet you’ll see something of yourself in what I’m about to describe and probably something of your loved ones. Let’s explore how money mindsets influence financial outcomes.

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Three Money Mindsets

Here are the three money mindsets I most commonly encounter:?scarcity,?abundance?and?realism. First, I’ll describe these mindsets in greater detail. Second, I’ll describe how people often end up with these mindsets, based on the stories clients have told me over the years. Finally, I’ll outline some risks associated with these money mindsets so you can consider how not to let your default money mindset get in the way of your goals.

The?scarcity money mindset?has to do with how someone feels about their wealth.?No matter how much money they have, no matter what the numbers tell them, they just don’t feel like it’s enough. Don’t get me wrong. They know they’re not poor. They don’t have to worry about where their next meal will come from, where they’ll sleep tonight or even if they’ll run out of money soon. The real challenge for someone with a scarcity mindset is that?they can always think of scenarios where they go broke.

Usually, in my experience, someone with a scarcity mindset had something pretty traumatic happen to them when they were young, often as a child. The interesting thing is that it doesn’t seem to matter if they were born into a family with little or no money.?It’s the event, the moment when things went wrong, that shapes them. Somewhere deep inside, they still feel the sting of that moment and they’ve never quite been able to shake it.

The?abundance money mindset?is almost the opposite.?This mindset is about believing there will be more than enough, even when the numbers don’t support that sentiment. I often find that people who demonstrate an abundance money mindset didn’t experience trauma in their childhood. They often grew up middle-class. They probably went to a good school and got a good job coming out of college. Abundance has just seemed to follow them. They don’t really overspend and their financial disciplines are good enough. But they’re default position on most things in life seems to be—it?will all work out in the end, somehow.

Often, people with an abundance mindset are high income earners. It’s not as if life has been easy for them. But they’ve pretty much always made good money, for as far back as they can remember. By personality type, they’re usually glass-half-full kind of people. They’re buoyant and tend to bounce back from adversity quickly. They don’t fear the future because, for the most part, they don’t think about it a lot. They tend to believe that tomorrow and the day after that and for all the days ahead, life will be pretty good.

Those with a?realistic money mindset?are neither influenced by scarcity nor abundance.?They tend to believe what the numbers tell them, even though they really can’t predict the future. They work with someone like me to create a financial plan, adopt some financial disciplines and then watch, carefully and at defined intervals, how things are going.?They recognize that their wealth could go up or down. They are prepared, if need be, to adjust a number of things, like how long they continue to work before retiring, how much money they need to save every year and how much risk they need to take.

There is a sobriety to the way they think about money. They want to take control of their situation by making moves that increase the likelihood of achieving their goals. They don’t really worry about money, but they also don’t take their eyes off their money. They pay attention to the details and can pretty much tell you, at any given moment, where they are on their journey to complete financial independence.

Key Take Away

“PEOPLE WITH A REALISTIC MONEY MINDSET CAN PRETTY MUCH TELL YOU WHERE THEY ARE TODAY ON THEIR JOURNEY TO COMPLETE FINANCIAL INDEPENDENCE.”

The Risks Associated With The Money Mindsets

Now that I’ve mapped out the three money mindsets, I’m curious about where you see yourself in these descriptions. Where do you see your spouse or significant other? Where do you see your parents? If you have adult children, where do you see their money mindset? Here’s why I ask.

People from the same household or family should understand the money mindset of those around them. This not only helps prevent conflict, much the way a Myers-Briggs personality survey helps you understand loved ones.?It can also help you balance out family dynamics so you increase the likelihood of achieving your goals. This is about risk management. Let me explain.

There are inherent risks to the abundance and scarcity money mindsets that I’d like to describe. Those with a scarcity mindset often:

• Take too few risks and risks that are too small.?They do this because?they cannot stand the thought of losing principle. It’s smart risk-taking that often produces financial breakthroughs that can be very meaningful. People with a scarcity mindset often pass on risks they should take.
• Tend to live well beneath their means.?Sometimes they do this even when it’s unnecessary. This can cause them to miss out on certain joys. For instance, they might drive an older car without modern amenities, like WIFI, simply because their older car is cheap to drive. Sometimes, among friends and family, they are known for being a bit miserly.
• Make delayed gratification a permanent habit. For example, they might have the money to take their family, including teenage children, to Europe for three weeks. But instead, they stay local. This causes them to miss out on certain life experiences that could enrich their family history and make memories that will outlive them.

Those with an abundance mindset often:

• Don’t pay close enough attention to details. When I meet with people with an abundance mindset, I’m often intrigued by the questions they don’t ask. I’ve presented complex financial plans to enough astute families now to anticipate certain kinds of questions. When I don’t get asked these questions, it makes me wonder.
• Struggle to tighten their belt when necessary. Most households will experience periods of having plenty and having barely enough. This happens for all sorts of reasons. But for most families to achieve their financial goals, they have to save, invest and stick to a plan despite thick and thin cycles. It’s been my experience that people with an abundance mindset struggle to cut back on spending when it’s necessary to achieve long-term goals.
• Are overly generous. I’ve had certain clients request to take money out of long-term investment vehicles so they can help a friend or family member in need. When I ask them if they’ve considered how this will impact their future, too often the answer is something along the lines of: “we’ll be fine in the long run but this person needs help now.” I’ve also seen a tendency to be too charitable, to financially support too many organizations.

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It’s The Tendencies That Matter

I want to say for the record that I don’t think any single person is completely scarcity or abundance oriented.?Most people are a blend of mindsets, often depending on how they feel about what’s happening in the moment. A scarcity person’s darkest fears tend to surface when the market takes a dip. An abundance person’s tendencies toward generosity are often based on the needs that are presented to them in the moment, even if it may not be an ideal time for them financially.

It’s how people tend to respond in these moments that can often have the most significant long-term consequences. If a scarcity person sells when the market is down, they miss the opportunity to participate in a recovery. If an abundance person gives away money they really shouldn’t, they may not have the funds to take risks that could really pay off over time.

This is one reason I like to ask my clients to tell me stories about their lives. The stories they pick, often from childhood, clue me in to their money mindset and their values. I’ve worked with enough clients now to also anticipate how certain money mindsets are likely to respond in certain situations. I believe I’m a better financial advisor today because I understand money mindsets. I’m also a more sensitive and effective coach to my clients.

I’ve learned to work with people who have a diverse range of life experiences. I’ve also helped them stay focused on their long-term goals and take action that is in accordance with their dreams.?Over the years, I’ve helped scarcity and abundance-oriented people take on more tendencies toward financial realism. I’ve come to believe that a realistic money mindset is the healthiest and tends to produce the best possible outcomes.

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Concluding Thoughts

My goal, in working with clients, is to help them achieve complete financial independence so they never have to worry about money again. I find that the scarcity and abundance mindsets tend to shape people’s decisions?far more than they often consciously realize. I sincerely hope that these concepts help you think about your mindset and values. I also want you to know that I really do want to hear your stories and welcome the opportunity to talk.