3 Millionaire Mindset Changes to Increase your Net Worth!
If you’ve ever watched the pre-game to any kind of sports event, you’ll probably notice most of these pro players sitting off to themselves, headphones on, looking like they're just trying to tune out the world. That’s what they are doing from the outside because what they’re doing on the inside is so incredibly important. They’re getting their mindset right for the game so they can be successful. They’re trying to visualize and remember the most important aspects of their game so they can succeed on the court or the field. But when it comes to personal finance, what’s the right mindset for becoming a Millionaire?
1) Tracking Spending is More Important than Budgeting
Although my research couldn’t find who to properly attribute the quote to, there has been a common phrase of wisdom in “What gets measured, gets managed”. Essentially, what is being tracked and evaluated is being improved upon. This is true for our finances as well. Our focus should be on tracking how much we spend and save and less on how much we allow ourselves to spend. This way, we can actually be aware of our progress and know where we spend too much or save too little. Then, we can start to set goals that make a profound difference to our strategy and evaluate them.
Let me try to break this concept down a bit. Imagine we have two people, Alex and Taylor, and Alex is our “Budgeter” while Taylor is our “Tracker”. Alex says,
“I think I’m spending too much out. I’ll only spend $100 a month for going out”
Since Alex is our “Budgeter” they’ll give themselves a limit on how much they want to spend and that’s it. They don’t assess how they’re doing. Taylor, on the other hand, says,
“I think I’m spending too much out. Let me start tracking it every month.”
So Taylor, our “Tracker”, doesn’t set any rules but just starts tracking their spending. Now, here’s how it goes for them;
Alex:
Starts off well and spends less than $100 going out the First Month but doesn’t know for sure.
After a few months though, Alex forgets this rule and starts to over spend every, now and again
Since Alex doesn’t Track spending, they don’t know how much they go over and don’t realize the went from $90/mo up to $110/mo on average over the year
Taylor:
Taylor looks at the first month and realizes they spent about $115 out which is TOO much for Taylor
Realizing this, Taylor decides to spend less but still no rule.
Next month, Taylor spends $105. The month after that $95.
At the end of the year, Taylor averages $90 per month without ever setting a goal amount
Of course, this is a hypothetical but how does this work? Taylor is actively paying attention to how much they spend. The tracking alone keeps their spending in the forefront of their mind, so when they go out, they are still actively thinking about how much they spent the month before and how it made them feel. It causes them to subconsciously spend less without setting a goal.
Alex on the other hand doesn’t take an active role. They simply set a rule and plan to stick to it, thinking it will help them spend less. However, since they don’t track how much they actually spend, they have no clue how they’re doing and end up forgetting their rule. It leads to more spending down the line because they don’t actively track how much they spend. Because the change wasn’t measured, it wasn’t managed.
2) Percent Saved is a Better Goal than Amount Saved
Now that we track our spending, we can go even further by setting some savings goals. Of course, there are many ways to set goals for your savings. If you have a trip coming up, you may plan to save a certain amount each month until the trip or you may do the math to ensure you max out your Roth IRA, but the one goal setting method that stands above the rest for long term growth is a percent based goal. Essentially, your overall savings goal should be set to a percentage of your regular income. Why does this work?
Well, the big benefit is it helps reduce Lifestyle Creep. This is the phrase used to describe the tendency for individuals to spend more money as they make more money, becoming more accustomed to higher quality or luxury goods with more income. Now, a percent saved goal helps offset Lifestyle Creep because your amount saved automatically increases with increased income. Let’s use Alex and Taylor again to compare. In this scenario, Alex and Taylor both make $3,000 a month. Alex set’s a goal to save $750 per month while Taylor saves 25%;
Alex’s Income = $3,000
Alex’s Savings = $750
Alex Spends = $3,000 - $750 = $2,250
Taylor’s Income = $3,000
Taylor’s Savings = $3,000 x 25% = $750
Taylor Spends = $3,000 - $750 = $2,250
Now, Alex and Taylor both worked really hard this year, so next year they get a HUGE raise to $4,000 per month. What happens to their savings if they don’t change their goals?
Alex’s Income = $4,000
Alex’s Savings = $750
Alex Spends = $4,000 - $750 = $3,250
Taylor’s Income = $4,000
Taylor’s Savings = $4,000 x 25% = $1,000
Taylor Spends = $4,000 - $1,000 = $3,000
So as you can see, neither person changes their long term savings goal but Taylor ends up saving $250 more per month. So with the increased income, both people end up spending a little more now each month, than still start to enjoy the finer things in life but Taylor doesn’t have to change their goals to increase their savings. Also, since Taylor tracks everything, they’re able to know how well they’re doing.
3) Pay yourself First
So we’re at a point where we know how much we’re spending, we have set percent based savings goals to help reduce lifestyle creep, but we take it one step further by paying ourselves FIRST! What we mean by that is to put our money into investments or savings before we can spend it on wants. Instead of paying Target or the credit card companies first, we pay our future selves first. This method ultimately benefits us by allowing us to stay timely and consistent in our investment strategy. As they say, “time in the market beats timing the market”. But how do we pay ourselves first?
One of the best ways is to set up Automatic Contributions. Essentially, as soon as you get your paycheck, or maybe before, the funds get automatically transferred into your savings or investments. A prime example of this is opting into your company's 401(k) plan. If your company offers one and you contribute, they will generally take the funds from your paycheck before you even see the paycheck deposited into your account. You can often also set up automatic investments with many brokerages so that when your paycheck direct deposit shows up in your checking account, you can have those funds automatically pulled into your investments. Of course, make sure to not contribute more than you can afford. Thanks to our tracking, we’ll know how much we need for our necessities so we can give the remaining funds a job.
The Wrap-Up
As your local, neighborhood TikTok Mental Health influencer will tell you, your mindset is critical to finding success. It’s safe to say, that is absolutely true. Finding how to focus your priorities and setting your mind to those goals can make a significant difference. In this case;
Tracking your spending keeps the expenses active in your mind. Your awareness to your spending is key
If you become complacent on your goals, you can start to lose them
Setting a percent goal for your income helps prevent Lifestyle Creep
Fixed savings amounts generally don’t account for raises as they come
Pay yourself FIRST! Looking out for Future you is a great way to ensure your Net Worth keeps increasing.
As much as this mindset shift can help, what helps more is to continue learning and educating yourself on your personal finance journey. Just remember, Financial Literacy is the Number 1 Key to Financial Success!
*Disclosure* This is NOT financial advice and I am NOT a Certified Financial Planner. All information is provided for educational purposes only and is not to be construed as advice. Everyone’s financial situation is different and requires individualized planning. Seek out a Certified Financial Planner for assistance with your own financial situation.
