According to a 2021 study from Credit Suisse, there are 62.5 millionaires worldwide, and the average wealth per adult is a mere $87,489. So what sets the millionaires apart from everyone else? If you take a hard look at the wealthiest people in the world, most of the time, their wealth can’t usually be traced back to one good decision. Rather, many credit their wealth to their overall mindset and their everyday decisions around money and investing. They have a wealth-creation mindset. So what sets these people apart from everyone else?
Many People Make Emotional Decisions Vs. Financial Ones
There are basic fundamentals of wealth that many of us ignore. One huge one is that many of us make decisions with our money for emotional reasons, vs. financial ones. Here’s the thing, there is not a plain right or wrong answer here. The most important thing is to understand what you are basing your decisions on. Are your reasons financial or emotional? Both are legitimate, but understanding the underlying aspects of your decisions will help you make better ones as you grow your wealth and plan for your future.
So ultimately, how can you determine an emotional decision vs. a good financial decision? If you can take that decision and put it down on an Excel spreadsheet and analyze it, it helps clarify if you are making a good or bad financial decision. Yes, there will be points in your life when you need to make a fight or flight decision. But understanding the difference between an emotional and a financial decision is worth putting down on paper.
There Are Other Common Financial Mistakes You May Be Making
Understanding why you are making the decisions you are making is the first step. But it’s likely that you are also making other mistakes that are holding you back.
Here are 4 other common financial mistakes you might be making:
- Buying the nicest house in the best neighborhood possible.
This is by far, the most disputed topic in personal finance. Buying a house in the best neighborhood possible with top schools is something that a lot of people desire. And while it’s not wrong to want to enjoy a certain lifestyle with your family, it can be a mistake that can hold you back from building wealth.
When you buy a house, there’s no real way to know if financially it will be the best investment because there are a lot of factors that go into whether or not your home value will rise in comparison with the money you put into the home over the years. Another con? A lot of people invest so heavily in their dream house that they lack the money to contribute to other, more lucrative, investment opportunities. - Paying off your mortgage (or any low-interest loan).
Along with buying your house, paying off a mortgage early is also a mistake. Sure, it sounds like a good idea to make more payments to prevent having that debt hanging over your head. But, if your end goal is to create wealth, it’s far better to invest the money rather than pay off a mortgage because you’ll get a return for that money. A mortgage is almost free money, especially if you’ve bought or refinanced in recent years with rates almost at 0%. Use your extra money to make money instead. - Saving instead of investing.
Simply put, investing is using the money you have to make more money. When you invest, you multiply your money’s capacity so that you can maximize your wealth. Sometimes people are more comfortable with a nest egg in the bank. While we are told to keep six-months of expenses in the bank, beyond that it may make more sense to invest if you are willing to take on some risk. As time goes on, the value of the dollar decreases. By keeping your savings in a low-interest bearing account, you are missing out on the full potential of growing your money into future wealth. Investing has the potential to generate much higher returns than savings accounts, but that benefit comes with risk, especially over shorter time frames. - Not planning for the future.
These days, many investors are faced with the reality of needing to save for both their child’s education and their own retirement. If this is you and you’re worried about how you are going to pay for it all, the most important thing you need to do is start saving now. Future expenses can be daunting but the sooner you start, the more time you will have to let your money grow.
There are a number of ways to save for retirement including 401(k)s, IRAs, and employer-sponsored retirement plans. Figure out which type of account is right for you and start contributing as soon as possible. Saving for college is a bit different, but there are still a number of options available including 529 plans. There are also a number of investment strategies you can use to maximize education savings, such as a Roth IRA, taxable investment accounts, and others.
If you’re looking to change your mindset and create wealth, avoiding the 4 mistakes I’ve outlined above isn’t going to make you rich overnight, but conquering them is a great first step. To create a foundation for building wealth, you’ll need to focus on making sound financial decisions everyday, putting your money to work in the right places, and building a portfolio of investments.
Written by Litan Yahav.
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