I have a colleague who makes upwards of $700,000 a year. She is one paycheck or small financial surprise from being bankrupt.
I know a factory worker who is a millionaire. He has nearly zero debt, enough cash to live the rest of his life and an estate to leave his family. He did this all on a blue-collar salary.
How can two individuals with such varying levels of income arrive at such different financial positions? Stock market volatility? Real-estate booms and busts? Inventing the latest version of the fidget spinner?
None of these. It all centers on financial mindset.
Tom Stanley spent his career studying the characteristics and actions of millionaires. His research changed America’s perception of the stereotypical millionaire. Not only did Dr. Stanley’s books report empirical evidence on the demographics of America’s millionaires, the research provided multiple illustrations of how millionaires think and act differently than the rest of us.
One of the most important illustrations is the concept of a “millionaire mindset.” More importantly, the idea of millionaires’ focus on what they keep, not what they earn.
Stanley delineates two mindsets. The Balance Sheet mindset, which focuses on what you own, what you owe, and net worth and the Income Statement mindset, which focuses on what you make verses what you spend (usually on a monthly bases).
Which are you? Here’s a quick test:
If asked, could you tell someone your approximate net worth?
Do you know your total debt and the associated interest rates of your loans?
Do you know measures such as your family savings rate? Your debt to assets ratio? Your total net worth?
When making a purchasing decision, do you think about how the asset you’re buying will affect your net worth in 5, 10, or even 20 years?
If you answered “yes” to all of the questions above you’re on the right track.
Another quick test: When purchasing a car, do you focus on the debt you’re accruing relative to the future value of the car or if you can afford the monthly payment?
If your answer centered on the value of the car relative to the debt, Stanely’s work suggests you’re thinking like a millionaire.
Stanley’s work shows that millionaires focus on making prudent purchases and thinking more about how purchases affect their net worth, not their monthly budget. In his words, millionaires are “balance sheet oriented.” If you didn’t answer “yes” to all of the above or focused on the car payment, don’t worry, you’re the target audience for this series of articles (consider yourself “income statement oriented”).
This article is the first in a three-part series discussing this idea within Stanley’s concept of the millionaire mindset. In the next article, we’ll delve more into the mindsets and actions of balance sheet- and income statement-oriented groups, and how you can think, and act, more like a millionaire. In the last article, I’ll provide some tools, resources, and tips for continuing to measure your progress to building true net worth at any salary level.