Are you struggling with your finances? Is the problem with your budget or with your mindset? Developing a net worth mentality can help you overcome typical middle class beliefs and experience financial independence.
Develop the right mindset
Most of us tend to believe that the path to financial success is based on our income and a smart monthly budget. However, when we start living from one paycheck to another, we are simply struggling to barely manage our finances instead of growing them. This is why it is crucial that we develop the net worth mentality instead of the budget or paycheck mentality, when it comes to improving our personal finances.
“A person with a budget mentality just focuses on increasing their income in order to increase their wealth. A person with a net worth mentality also seeks to boost their income, but builds their wealth through saving and investing as well,” explain Brett and Kate McKay, authors of the Art of Manliness.
With the paycheck mentality, you tend to spend your earnings to survive each month. This can lead to a lot of anxiety as you wait for the next paycheck to roll in. However, when you have the mindset to build your net worth, you not only focus on spending less, but also build the habit of growing your wealth each month.
What is the net worth mentality
This mindset forces us to look at our personal finances from a long-term perspective. It not only encourages us to manage our finances beyond the month, but shows us how we can increase our funds to experience complete financial independence. The net worth mentality is a concept for financial success which is derived from the insightful book The Bogleheads’ Guide to Investing by Taylor Larimore, Mel Lindauer, Michael LeBoeuf, and foreword by John C. Bogle. On page 7 of the paperback edition, the book explains this mindset as:
“From the time we are old enough to understand, society conditions us to confuse income with wealth. We believe that doctors, CEOs, professional athletes, and movie actors are rich because they earn high incomes. We judge the economic success of our friends, relatives, and colleagues at work by how much money they earn. Six- and seven-figure salaries are regarded as status symbols of wealth. Although there is a definite relationship between income and wealth, they are very separate and distinct economic measures.”
It adds “Income is how much money you earn in a given period of time. If you earn a million in a year and spend it all, you add nothing to your wealth. You’re just living lavishly. Those who focus only on net income as a measure of economic success are ignoring the most important measuring stick of financial independence. It’s not how much you make, it’s how much you keep.”
The budget or paycheck mentality keeps us focused on growing our income as opposed to growing our net worth. One you realize the importance of saving money and become very intentional about your spending, you can finally start shifting your mindset to focusing on net worth. This will not only enable you to earn more money, but empower you to keep more money and build security and long-lasting assets to have a better life for you and your family. The key is understanding that income and wealth are separate ideas.
Read also: Can Saving Money Make You Happier?
Author and entrepreneur Trent Hamm explains “It’s not how much you make, it’s how much you keep. That’s a very strong assertion… The money you keep is the money that will allow you to be truly financially free. The one true path to a future where you can do whatever you want is to have a high net worth.” This is the reason why the rich get richer and how you can start thinking like a rich person.
Ways to shift to net worth mentality
If you want to develop a net worth mentality, then you need to start by changing how you look at money. Once you do that, you need to change your thoughts, attitudes, behaviors and practices related with your personal finances. When you do this, you will be able to develop the right habits to help you shift from a budget mentality to a net worth mentality.
Brett and Kate McKay explains “Increasing your net worth is just a matter of paying off debt, saving more, and earning more. Simple in concept, but often hard to do. You really have to start playing the long game with your finances when you switch from a paycheck to a net worth mentality.”
Here are a few ways that can help you get started and boost your net worth:
1. Spend less than you earn
If you want to increase your wealth, then you need to be more intentional about your spending. When you practice frugality, you add more value to your life. When you understand that it is not necessary for you to spend your entire paycheck in a month, you will realize that you can use the same paycheck as a tool to increase your wealth. So every month you need to plan your personal finances in a way that you will still have money left in your bank after your monthly expenses, savings, and retirement planning. To do this, you might need to prioritize your expenditures and cut out unnecessary things.