5 Mindsets That Get in the Way of Creating Wealth
Thinking style matters when it comes to money and stress.
Posted Nov 27, 2019
Money is a major source of stress for most of the U.S. population. In the American Psychological Association's 2019 research, 60 percent of respondents said money is a significant source of stress, which tied with work (64 percent) as the most commonly identified source of major stress.
Undoubtedly, the reasons for people's money worries are complex and issues like income inequality and racism play a role. However, mindset plays a role, too. Your thinking style can make it either more or less likely you’ll accumulate significant wealth.
Let's look at five cognitive factors that get in the way of creating wealth, even amongst people who earn a good salary at their jobs. You're less likely to accumulate substantial wealth if:
1. You're unwilling to deal with things going wrong.
Some folks doubt their psychological capacity to cope with the kinds of stressors that inevitably are part of business or investing. There will always be market downturns. There will always be problems with customers and suppliers. You'll always encounter dishonest people, ripoffs, or theft. If you're very self-protective and unwilling to expose yourself to any of this type of stress, you won't get very far.
Stress has a particular nature whereby if you're unwilling to experience certain types of stress, you'll end up with other types of it. For instance:
- If you're unwilling to experience the stress of investing, you end up with the stress of having less money.
- If you're unwilling to experience the stress of learning new skills, you'll end up with the stress of worrying about whether there will be a demand for your existing narrow range of skills or low-skilled work.
- If you're unwilling to experience the stress of entrepreneurship, you'll have the stress of someone else setting your job conditions.
There's no escaping stress; there's only choosing the type of it you most want to avoid.
2. You’re biased towards seeing opportunities as potential scams.
There are a lot of real scams out there, but great opportunities can also seem like scams, or just seem absurdly risky. For instance, using Airbnb (as either a host or guest) isn't strange these days, and even my 80+-year-old father-in-law does it. However, when Airbnb was newer, people were much more skeptical about it. Many early adopters were able to generate significant income and wealth by becoming hosts in the early years, especially in popular cities in which regulation and enforcement now make being an Airbnb host more difficult.
Likewise, for a period early on, drivers for Uber got paid a significant amount just for being available for rides, regardless of whether they got any. Some folks made out extremely well from this.
If you were interested in these ventures but waited until these companies were as mainstream as they are today, you would've missed these opportunities. Sometimes, offers that seem too good to be true are just too good to last, and people who jump in early get rewarded.
Folks who think everything is a scam aren't prepared to fish in waters where scams and ripoffs are present (e.g., Craigslist or eBay), but where there are also amazing deals if you're prepared to learn the skills for distinguishing good deals from bad.
3. You think opportunities are limited.
Some folks have the mindset that all the good opportunities are gone. Someone with this mindset might ruminate about business ideas someone else has already brought to market, or that prices for stocks or homes have gone up generally. Do you think the grass was greener a year ago, or five years ago, and now it's hopeless? This mindset can delay people from ever getting started with investing.
Paradoxically. the opposite behavior can sometimes result from the same mindset. People who think opportunities are limited also sometimes impulsively rush into accepting bad deals because they think they've missed all the good ones. This can be especially common if, for example, you put in an offer on a house and got outbid. If you think opportunities are finite, you might be so scared of missing out on anything that you overbid the next time or make an offer on a home that isn't right for you.
4. You have no interest in business, investing, or deals that provide easy extra cash.
It's hard to become wealthy just by being good at saving if you don't also pair that with some form of investing. Your savings need a multiplier. There's a common theory that every $10,000 of savings can produce about $400 a year of perpetual income if it's invested in the broad stock market. This is known as the 4 percent rule. This is both great, and not a lot. You'd need a million dollars in savings for a $40,000/year income.
On the other hand, earning $400 extra every year can be done pretty easily from participating in just one or two deals. For instance, recently, the U.S. Mint released a highly limited coin that costs $65 to buy and is already reaching resale prices of $1000+ from collectors. These types of deals are often widely discussed in online communities of folks who network about these types of things.
Once, I got $1000 for signing up for a bank account and completing a few requirements. While that specific offer isn't available, there are many others, all with different requirements. Some require large deposits, but many don't. Benefiting from these offers mostly requires reading the terms carefully and identifying which have requirements you can easily fulfill.
In the information age, how to capitalize on these opportunities isn't a secret. The information is widely out there for anyone. However, you need some level of appetite for collecting these easy wins. If you don't have a natural appetite for money or deals, then small, easy wins might not feel like they’re worth the effort. Individually, they may not be—but the more you’re predisposed to pick up these easy wins, the better you’ll get at it, and the effort to reward ratio is likely to shift for you.
5. You like to stick with what's familiar.
Sometimes people view their comfort zone as static. They want to stay within their wheelhouse. Easy financial wins, or even investing in general, might feel out of your wheelhouse.
People under stress are often in a catch-22 situation in that their psychological capacity to take on novel challenges and venture into the unfamiliar can be highly limited due to their existing stress. Breaking free of this trap can be very challenging. If your current self is drowning, you’ll naturally mostly care about the well-being of your current self and not your future self. The more you have a natural appetite for venturing beyond the familiar, the more likely it is you’ll be able to see how expanding your comfort zone is a pathway to lower future stress.
Certain cognitive styles make it more likely you’ll accumulate wealth, including just having an interest or a desire to do that. If you don’t naturally have these inclinations but having more money would reduce your stress, you can gradually shift your thinking style in these directions and use metacognition (awareness of your thinking biases, like if you have a bias towards pessimism or excessive threat sensitivity) to help you.
Another option is to seek out mentors, partners, and other support people who can model this type of thinking for you. The more you experience success with money, the more that reinforcement will shift your cognitive style too. Successful experiences may also shift your sense of identity—e.g., from thinking of yourself as someone who isn’t good at investing to realizing you have skills and strengths that are suited to it.