The Paradox of Wealth
In his book, "The Psychology of Money," Morgan Housel highlights an intriguing paradox: while acquiring money often requires taking risks, being optimistic, and embracing opportunities, maintaining and growing wealth require an entirely different mindset. I’ve said before that I’m not interested in the FIRE (financially independent retired early) lifestyle, but what I am interested in is learning as much as I can about how to be wise with my money, and how to grow and maintain wealth so I’m able to live a comfortable life both now and in the future. The concepts that Housel introduces in his book piqued my interest so I decided to dive in a little deeper. Let’s take a look at the differences between acquiring wealth and maintaining it…
Maintaining Wealth by Embracing Luck
In the pursuit of wealth, people often associate success solely with their efforts, intelligence, and skills. While hard work and diligence are obviously important, it is crucial to acknowledge that factors beyond our control significantly influence financial outcomes. Recognizing the role of luck in our financial achievements instills a sense of humility and guards against overconfidence. When I first read Housel’s thoughts on how luck plays a much bigger role in “getting rich” than we often think, I felt… vindicated? Maybe? Like, OH that’s why I’m not a millionaire at age 30. But, as someone who craves control, it is also a bit nauseating to think that I can control some of my financial destiny but not all of it.
Maintaining Wealth by Staying Humble
If you’re like me, when you see someone who clearly has plenty of riches, the last word that comes to your mind to describe them is “humble.” Contrary to popular belief (or, maybe just my belief), to maintain wealth, humility becomes an essential attribute. It entails a willingness to acknowledge that what has been gained could be lost just as quickly. Embracing this mindset encourages a more cautious approach to financial decision-making, emphasizing risk mitigation and the preservation of capital.
Maintaining Wealth by Frugal Spending
Frugality is a key aspect of wealth preservation, but don’t hear what I’m not saying – being frugal is not the equivalent of being cheap. Rather, frugality involves making intentional choices and prioritizing long-term financial well-being over short-term gratification. For example, being frugal could mean buying $100 jeans from Madewell instead of $20 jeans from H&M, because the Madewell jeans will last you years longer than the H&M ones will. Through frugality, you can build a strong financial foundation, reduce unnecessary expenses, and allocate resources toward savings and investments.
Maintaining Wealth by Being Mindful
Being mindful of spending habits is an essential aspect of growing and maintaining wealth. It requires intentionally evaluating needs vs wants and committing to live within your means… even if that means waiting to buy that new Tesla you have to have. Cultivating mindful spending habits involves creating a budget, tracking expenses, and making conscious decisions about where money goes. By focusing on value rather than temporary pleasures, we can strike a balance between enjoying life's experiences and securing our financial future.
Maintaining Wealth by Diversifying
While acquiring wealth often involves taking risks, preserving wealth requires a more conservative approach. Diversification, the practice of spreading investments across different asset classes, is a crucial strategy for mitigating risk. This can look like keeping some of your savings in cash, some in a 401k, and some in a Roth, or it can look like spreading your money across different classes in the stock market such as index funds, ETFs, bonds, etc. By diversifying investments, you can minimize the impact of market fluctuations on your overall portfolio. It's important to note that preserving wealth doesn't imply avoiding all risks but rather managing them wisely to protect against significant losses.
Housel's insights remind us of the importance of adopting a long-term perspective when it comes to managing our finances. Focusing on short-term gains or chasing get-rich-quick schemes often leads to disappointment and financial instability. Instead, embracing patience and discipline can help us weather economic downturns and benefit from compounding growth over time. By remembering these things, we can adopt a mindful approach to money, preserve our wealth, and pave the way for long-term financial success.
