People often have misconceptions about why others become rich. They think that rich people are smarter than everyone else. If that were true, the richest people in the world would be 4.0 GPA graduates of the toughest college programs, which is not the case by any stretch.
They think that rich people got lucky. While it’s true that many extremely wealthy people have gotten some good breaks or been in the right place at the right time, all the luck in the world by itself won’t make you rich unless you win the lottery.
They think that rich people are the hardest workers. While it’s true that many rich people have strong work ethics, there are multitudes of people who work just as hard and never achieve massive amounts of wealth.
One of the biggest things that separates rich people from the non-rich is how they think about money. Rich people tend to have certain mindsets and ways of thinking about money that run directly counter to the way poor and middle class people think about it. These kinds of differences are one of the major factors in explaining why certain people become rich while others don’t.
Long Term vs. Short Term
Albert Einstein is reputed to have said that the greatest power in the world is compound interest. Understanding this quote lies at the heart of one of the ways that rich people think about money differently than most.
The rich tend to consider not just today, tomorrow and next week or month, but years down the road. When making financial decisions, they consider how that choice will impact their financial future years or even decades from now. This causes them to do quite a few things differently than many poor and middle class people.
For instance, a rich person might invest in improving themselves more early in their life if they know that investment will pay dividends tenfold over the course of their working life. In contrast, someone else would look at the up front time and expense and choose to spend that money and time on something with more immediate benefit but less long-term value.
Investing vs. Saving
Rich people tend to invest. Middle class people tend to save. The difference seems minor, but it reveals a fundamental difference in how rich people view money in contrast to others.
For the rich, any excess money they have is an opportunity to make more money. As a result, they look for investments which stand to gain them as much as possible within the bounds of their tolerance for risk.
Contrast that with the middle class mindset when it comes to savings. Expressions like ‘saving for a rainy day’ exemplify this mindset. Extra money is to be stockpiled in case some unforeseen disaster or bad circumstance comes along.
While saving money in case of emergencies is much, much better than not saving at all, it’s not the way rich people think about extra money. And their willingness to view that money as fuel for investment rather than something to sit on leads to increased wealth over time.
Entrepreneurship vs. Employment
Rich people tend to think that the best and fastest way to make money is to start a business. Middle class people tend to focus on the risk of starting a business instead.
What rich people realize is that often times having a job is nearly as risky as starting a business. While a business can go under, you can also be abruptly terminated or laid off with no warning. So the perception of risk is slightly skewed to begin with.
But the main realization that the rich have about entrepreneurship is that if a business succeeds, the profits go to themselves. Working a steady job means that you’re definitely contributing surplus value, and that value is going to the owners and stockholders of that business.
Risk vs. Risk Aversion
Rich people tend to be ok with taking financial risks, as long as the risk is measured and justifiable. Poor and middle class people tend to be risk adverse when it comes to finances.
The rich know that no one is successful in everything they do. Some ventures and enterprises will fail. As long as you’ve protected yourself from utter ruin, a financial failure isn’t the end of the world. Middle class people tend to try to set up situations where they’re protected from the possibility of failure, but at the expense of the possibility of the upside of success.
Rich people are willing to take on calculated risk because they know that with risk comes potential reward. They weigh not only the downside, but the upside as well.
If an investment has a 20% chance of producing a return on investment of 1000% and an 80% chance of returning nothing, that means the expected value of the investment is 200%. A rich person is far more likely to invest money they can afford to lose on a venture like that, whereas a middle class person will look no further than the 80% failure rate and decline.
Investments vs. Purchases
The wealthy see everything they buy as an investment. Poor and middle class people don’t view the majority of their purchases that way.
When a rich person buys something, whether it be a house, a car, a television, a new pair of shoes, whatever it happens to, he or she is looking at it as an investment. It’s investing x amount of money for y amount of benefit. In contrast, most middle class people tend to view many purchases other than major ones far less analytically.
The interesting effect of this difference in thinking is that often times it’s cheaper to buy things like a rich person than not. Rich people think about longevity of use and how the things they buy will help them do other things, often times things that will make them more money. By thinking about their purchases as investments with a return on investment, they frequently make better purchases from a financial standpoint.