15/08/2023
Mindsets can be used to categorise people. In this case, these common beliefs (spending habits and relationship with money) help segregate the rich and the poor. How?
1. Compounded interest works for the rich and against the poor.
The fundamental difference in mindset between the rich and the poor is, the rich have understood a very simple principle: money makes money, and the money that money makes, makes money. Rich people see money as an opportunity, poor people see it as something to be earned.
Rich people are said to make money work for them. Instead of just working and relying on income, a rich person would take a proportion of their income and invest it.
Compounded interest works in favour of the rich. This is because it will eventually turn $1000 into $10,000. Ultimately, a rich person can choose not to work and live off revenue generated through investing. However, most of the time the rich work because they like what they do, not because they need money.
Poor people are said to work for money. They neither save nor invest it.
A poor person sees $1000 as just $1000. A poor person works paycheque to paycheque for the rest of their life.
Poor people, at best, spend everything they earn by buying stuff from the rich, whether they need it or not. They have nothing left at the end of month. But real poverty is when people spend money they don’t have, accumulating credit card debt. Compounded interest rate plays against the poor as it will eventually turn $1000 debt into $10,000.
2. Rich people expenditure vs Poor people expenditure
Essential Spending
Rich people spend on necessities and what is needed, not what is desired. For example, a rich person who has run out of milk will walk into Sainsbury’s to buy a carton of milk, nothing more.
A rich person with a perfectly functioning phone would not need to spend money on a new one. A truly rich person does not care about trends, they care about net worth.
Impulse Spending
Poor people spend on both necessities and desires. For example, a poor person who has run out of milk will walk out of Sainsbury’s with more than just a carton of milk.
A poor person spends beyond their means. They care about the latest trends, not about net worth. Poor people care about image.
3. Goals: rich people think long-term, poor people live on instant gratification
Rich people think long-term, which is increasingly hard in our society that is driven by instant gratification.
Poor people set at best short-term goals, or none. They do not see the necessity of long-term goals such as money for future living. The poor tend to live paycheque to paycheque. When a crisis hits, making ends meet is nearly impossible.
For example, a poor person made redundant during Covid-19 would suffer tremendously from the lack of savings. Life would be made much harder.
4. Attitude towards risk
Rich people tend to be risk takers
A rich person is more likely to take calculated risk. They can afford to take risk because they have diversified assets.
For example, when given an opportunity to invest in a startup, rich people are more likely to calculate the risk of this investment. If the estimate is satisfactory, rich people see this as a chance to increase their wealth.
Poor people tend to be risk averse
A poor person is more likely to be risk averse.
For example, when given an opportunity to invest in a startup, poor people are more likely to immediately turn this down. They do not see this as a chance to increase wealth. They see this as a reduction of their disposable income.
5. Attitude towards Learning
Rich people are eager to learn
The biggest compounded return does not come from bonds, stocks or even real estate. It comes from education. Most millionaires were not born millionaires, they learnt how to build wealth. The more they learn, the more they understand the world. The easier it is to connect dots, the more money they make.
The rich recognise they do not know everything. The rich are not afraid to seek advice. They recognise something can be learnt from everyone.
Poor people are not eager to learn
Poor people do not enjoy learning.
They care about instant gratification. They care about image, and what people think of them. Hence, they do not know what they don’t know, they dislike hearing opposing perspectives and quickly feel insecure when challenged.
Being rich is but a dream for the poor. As they do not have intellectual curiosity to learn, they choose to believe the rich are either born rich, evil or exploit the poor. They do not recognise that they are mostly poor because of their lifestyle choices.
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