How do you define wealth? The dictionary says wealth is “a large amount of money and possessions.” But I propose the following, straight-forward definition: wealth is the difference between what you are earning and what you are spending.
If you have never been “rich,” you’ve probably never defined yourself as wealthy, but no matter what your definition of “rich” is, most of us want to be rich. But why? Do you think that your financial problems will go away if you suddenly acquire more money?
Well, the studies disagree. According to a 2010 joint study conducted by Vanderbilt University, the University of Kentucky and the University of Pittsburgh, the more money you win in the lottery the more likely you are to go bankrupt. Yikes. And a study by the National Endowment for Financial Education estimates that 70% of people who unexpectedly come into large sums of money end up broke within seven years.
Also consider in 2009 a Sports Illustrated article revealed that 60% of former NBA players are broke within five years of retirement and 78% of NFL players have gone bankrupt or are under financial stress within 2 years of retirement.
Why? Because your income, or the amount of your sudden windfall, are just numbers. If you don’t know how to manage money, it won’t matter how much you have. Assuming you earn enough to cover fixed expenses like housing and healthcare, your underlying habits are what contribute to financial success or failure.
When people without those skills suddenly come into more money, they often increase their spending correspondingly. They haven’t become wealthy—they’ve just suddenly become rich. They haven’t learned good financial habits, and they don’t practice the financial restraint that wealthy people to hold onto and grow their money. Being rich means you have money. Being wealthy means you know how to keep it.
The good news is that if you earn a living wage you can change your financial habits and create personal wealth. Cut back on needless spending, and start buying based on needs (a reliable car) versus wants (a brand new sports car).
Understand what a good investment is instead of getting sucked into fun and flash. Actually do something with the money you begin to save by acquiring assets: investments, retirement plans, healthy savings accounts.
By curbing our enthusiasm to spend now, you can begin to develop personal wealth and habits that will continue to serve you as your income increases. Yes, this feels harder at our current income than it seems like it would be at a higher income, but the studies don’t lie. Wealth comes from how we think about money far more than from how much money we have.
For more information on savings, retirement and money management, Liberty Savings is always here to help! Read about these topics on our website, stop by any branch, or talk to an investment counselor for more information.