Rich Thinker, Poor Thinker

{16 Comments}

“My money: it comes in and it’s gone. I don’t even know where it went!”

We’ve all heard at least one tale of ‘disappearing money’ from a friend, a family member, or a coworker. Sometimes it’s just a joke. But sometimes these types of comments are indicative of a deeper problem. This problem may be overspending or excessive debt,. Such complaints are a key example of the poverty mentality. The subtext of this statement is “I have no control over my money. To make myself feel better, I’ve convinced myself that such control is impossible.”

Wealthy people (I don’t necessarily mean “rich”, it just made for a good title) have a strong locus of control. This sense of control is a key part of empowerment – the feeling that you can change your situation by affecting the world around you. More importantly, wealthy people take responsibility for their lives.

The poor, typically, do not have strong loci of control. This difference is a key aspect of distinction between the wealthy mentality and the poverty mentality.

Most of my money does a disappearing act, but it’s a different kind. My paycheque largely disappears into my savings. It’s not usually locked away, but it’s at least inconvenient to access. Living within my means and automated saving make this possible. But most importantly, I have a strong locus of control, because I always feel that I’m the master of my money.

Do you have a strong locus of control or none at all? Do things happen to your money, or do you make things happen with your money?

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16 Comments… Share your views

  1. It’s all about delayed gratification, baby! This discussion always reminds me of the Stanford marshmallow test; I seem to recall reading somewhere that there was a correlation between being able to delay gratification in the marshmallow test and being a saver (versus a spender) later in life. I found an interesting article on the general topic: http://www.thedailybeast.com/newsweek/2011/10/30/the-new-science-behind-your-spending-addiction.html

    • Excellent article. The ability to defer gratification is critical for saving money, but also in many parts of life. Clearly education is essential to overcome our more basic instincts. As we’ve discussed before, the majority of people don’t get taught basic financial literacy skills at home or school.

    • PS any chance we could start a business offering “TMS” therapy in conjunction with credit counselling and financial advice? lol

  2. My wife and I bring in a pair of LARGE Salaries…. We live in a very expensive part of the country but even with a higher cost of living each pay we move MOST of our cash into various savings accounts. IF we needed it we COULD get it. We generally do not. One of the problems we have is not taking on aggressive investments… We probably should being young with piles of cash, assets and zero debt?

    In the age austerity the part of the federal government we work for is giving us a raise! Our salary grid is moving by 8% possibly… We need to start making some more aggressive investments with our quickly growing stock pile of cash. I know its a problem we feel blessed with… But, How do we take what we have and get it working for us!? We also face GIANT tax rates. How can we invest in ways the mitigate that? Is their a smith move for those of us that don’t need/can’t own a house were we work for the rest of ya’ll?

    • I have the exact same problem. I have some investments, but I have a ton of straight-up “high-interest” (aka low interest) cash.

      In a deflationary environment e.g. housing in America, cash is king. If (when) housing prices fall in Canada, people who waited out the market and accumulated liquid capital will get rewarded. But obviously you can’t stick all your money in housing, even if there is a collapse. The trouble is, market performance seems to be ridiculously correlated even though this has traditionally been NOT the case (and it’s really paradoxical).

      To mitigate taxes, rule #1 is to use tax-advantaged vehicles, so always max out RRSPs and TFSAs. Secondly, invest in dividends (whether it’s publicly-traded or private businesses). Capital gains are tax advantaged, too, but not as much as dividends – and as you know I think that counting on capital gains is simply gambling. Interest is the worst way to earn money outside of a taxable account.

      I am going to construct a hypothetical “million dollar” portfolio sometime in the near future. Let me spoil it by saying it would be composed of a lot of extremely low MER index funds, e.g. the TD eSeries funds. Also, I’d want to add some less popular ETFs or Indexes, such as junk and lower-grade bonds (about 10 – 20% of the portfolio). I won’t get into specific composition yet but if you decide to hop into heavier investing, always remember: diversify and dollar cost average (don’t put your money in at once). Say you have a $120k nest egg and you can put away $5k a month from your salary. Invest all of your $5k, each month, in a diversified manner that approximates your total intended allocation (with such a small amount, perfect replication probably won’t be possible – just watch where the money goes and even out over time). For your $120k nest egg, first keep a BIG chunk in cash as your emergency fund, and to allow for liquidity from month to month (e.g. make sure you can fill your TFSA on a whim), and to pay for any purchases (e.g. a home downpayment). Then divide up the remainder of the nest egg (let’s say $40k) to “top up” your monthly contributions by a few grand, to ensure you’re getting the benefit of dollar cost averaging.

  3. I would have to say that I used to be a “non-thinker” rather than a poor thinker in relation to my money. Of course as I’ve said before I never really needed money for anything so it was irrelevant to me. Now that I do have bills people that depend on me et cetera I really feel as though I am making the right decisions to change that attitude towards that of a rich-thinker. It is a learning experience so I expect to stumble along the way but at least I am being conscious of the situation now. It sounds weird to say but taking the time to review my finances and think over what moves I should make with them gave me an extremely good feeling. I think poor thinkers are just lazy.

    • I’m very glad that you reflect on your financial health and progress. I hope this blog gives you a daily reminder or some ideas in this respect. I know this blog has been very good for me. I think that it has made me try new things that I wouldn’t otherwise have done. It hasn’t really made me save more – I already did before starting the blog – but it’s added some balance to my life.

  4. I am in charge of my money. I know exactly where every penny of it goes. I’m a huge believer that it doesn’t matter how much money I make – I should still know where every penny goes.

    Then again, I’m a crazy person and had to teach myself how to spend…

  5. I believe I have a fairly strong locus of control. I keep lists of pay dates / expenses for the period. All my pay goes into my savings account and then I transfer what’s required into the chequing account. For some reason the bank always takes the position that your money should go into the chequing account. For example, the other day I deposted a whack of coin and a cheque, in person, at the bank. The staff didn’t ask but was automatically going to put it into my chequing account. Good thing I specified savings when I requested that she deposit the cheque for me while I was there to save me visiting the machine. She seemed surprised. But I digress. I know what my incomings and outgoings are and everything starts at the savings account, out of which the money flows to make the payments that I make. I don’t particularly like having balances on my line of credit or credit card and so I find every means possible to pay those down, always paying a lot more than the minimum monthly amount. That way, when I get the balances down to zero, its whoopie, and the plotting begins on where that “extra” money is going to go. Usually to my TFSA, “slush fund”, and/or RRSP. I love it when that happens, the sense of freedom that I’ve worked hard to get done what needed doing, looked after the expensive emergencies, been able to buckle down to pay the credit off and now have that money all to myself again is true!!! Wuhu.

    • I look forward to hearing someday that you’ve paid off all of your LoC and CC and that your Emergency Fund is big enough to cover unexpected aberrations in expenses and revenues. Also I need to throw in a plug whenever I hear that somebody has a credit card and any other loan: please always pay all of your extra funds on the highest interest debt first (probably the CC) while making the minimum payment on any other source of credit. Further, please call your credit card company and demand that they lower your interest rate.

  6. I know the feeling of disappearing money. It feels like no matter how hard a try to save I always end up cutting it fine towards the end of the month.

    I like the idea of putting away big chunks of money so you can’t access it and are essentially forced into saving.

    I have recently opened another bank account, so I may filter off some of my wages into this account and see if that makes a difference.

    Thanks for the advice.

    Mary

    • Hi Mary

      I think you’ll find this method works, especially when you get it honed down to a fine science.

      I’ve had more than one bank account for years. My main operating accounts (eg/ salary and payments here) is with a major bank. Rather than letting people try to tell me that I have to have my paycheque and anything else deposited into the chequing account, I opted for the savings account route. I keep a roster page of “Pay Date; Expenses for the Period:” and, accordingly, once the funds are in the Savings account the appropriate amount can then be filtered over to the chequing account. That way I know and have control about how much money is coming out of the chequing and to where its going; the savings is then mine.

      I have two other bank accounts, one a sort of slush fund, the other a “no touch” account (the TFSA). I have an auto transfer amount into the slush fund and when funds are sufficiently high there, I’ll do a transfer over to the TFSA. Although this is now starting to feel rather cock-eyed and I feel I will have to rethink where those funds go; will they be better off going regularly into the TFSA? Or what; depends I guess where the most interest is going to be earned.

      Being a single female on one income and also being a homeowner, I’ve been able to keep everything going without any major financial disasters and as a result I have built up an excellent credit rating. I’ve got everything shaved right down to the last micro-cent and although I wish I could squeeze more out to service more pots, I cannot. So its working well for me; I know whatever system you set up for yourself will work just as well for you!

      • Great response! :) I would highly recommend locking away the funds from the “slush fund” asap, just to keep it more out of reach.

        The only thing I’d add is that besides a TFSA everybody should – hopefully – have an RRSP (particularly if they don’t have a workplace pension of any kind)! RRSPs can be even better than TFSAs for locking away savings because accessing RRSP funds is so prohibitively expensive (except in particular circumstances, e.g. homeowner’s plan or eligible tuition).

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