Habits Create Wealth

Everyone, pretty much, wants to be wealthy. But many have poor habits, so will never make it there.

Okay, never say never. And the only thing it takes then to build wealth is a change of habit…or multiple habits. But, one at a time, of course.

A lot of different activities, or habitual activities, will help you to get wealthy. Books have been written on them – wake up early, surround yourself with successful friends, have a plan, always work on the Principle of Pareto (i.e. the 80/20 rule), save 20% of your income, invest and dollar cost average, start a side hustle, don’t buy lattes…

Let’s just discuss one simple habit that all wealthy people have mastered; and poor people have not: Delayed gratification.

A young man was in my office one day discussing getting approved for a home loan. I was impressed by his organization and demeanor. Just a bright fellow with a bright future. We were reviewing the supporting documentation for his loan, and he made a solid income, so no problem there qualifying for the home loan, and had really good credit.

We got to assets, and there was not much in the bank accounts he brought in. Not atypical at all. It does beg the next question, “where will your down payment come from?” A very common answer to that very common question is usually, a gift from family or a loan against the 401k or selling the boat or, even, I am just saving for it, and just want to know the target. All good answers.

This young man had a less common answer, but still good: his father had recently passed away and left him $100,000.00 inheritance. Sad, on the one hand, as I imagine his father died quite young. But, what a gift to give to leave a nest egg that could help him buy the house, and thus build wealth over time, and invest the difference in whatever he decided to invest it in. I just hope I can do the same for my kids one day.

So, all was good, we underwrote and approved his home loan, and he found just the right house and the contract was accepted. The future was bright, indeed.

Then his real estate agent called me a couple days before closing, and sounded a little worried. “Does he still have enough for the down payment to close on this home?” she asked.

“The loan is clear to close, so I assume so. Why?” I asked.

“Well, he just drove up in a brand new black pickup, all decked out. It’s a cool looking truck, but had to be $65K!” She sounded disappointed. So was I.

Delayed gratification.

The home took a very small percentage of the $100K inheritance. Had the difference been invested with a return of 9% that would have blossomed into $500k over the next 20 years. A real gift. The truck will not be worth that in 20 years.

Delaying gratification is not easy.

But the cool new black pickup does have to be replaced with something of greater value. And that is where real life differs from that cold, academic financial experts.

Something emotional would need to change in us to delay the gratification of that new truck and put a higher value on making that money grow. I get it, the promise of half a million dollars 20 years from now does nothing for the emotions. Not compared to pulling up in that pimped truck and watching his buddies’ reactions. The emotion on the former does not even register; the latter puffs out the chest with pride. No comparison.

Changing that is not easy. But it is possible.

The emotional high is just as great when, one day after work and enjoying a cold one, all the guys are complaining that the work is hard and they just cannot seem to get ahead…and one of the guys chimes in with the fact that he has been able to save $60K over the past 3 years. All the guys with $1500 in their checking accounts are just as impressed. Well, probably more so.

But that’s 3 years away. The truck is today.

So how do we change the emotional reward so that building wealth, delaying gratification, is more emotionally rewarding?

If one size fit all, life would be easy.

So, everyone has to find their way to make building wealth sexier than instant gratification.

For some it is the bragging rights of constantly finding the good deal. The great deal negotiated on the truck I am currently driving, and paid cash for, causes as much pride for many. The best deal on the new appliances that look great in the kitchen, or the extreme coupon-er who bought groceries for the family for $385 this month.

Others need quick, or relatively quick, wins. Little goals, relatively quickly accomplished, create an emotional high that just needs another, really quick, emotional high again. That’s where I love the 52 Week Savings Challenge that I have been seeing on Facebook. It is a series of savings goals, starting at $1 in week one, that leads to having saved just shy of $1400 for the year.

I love this concept. The money is just not that much. But the emotional wins, and getting creative to make sure that, next week, I can meet the stepped up savings goal is a huge emotional success.

Here is a chart for the 52 Week Savings Challenge:

Source: The Simple Dollar

Others may need a bigger challenge – maybe building a business that replaces their current income. That $100K inheritance would have gone a long way to a disciplined approach to building a business with no debt that was focused on profitability.

Imagine those bragging rights over the beer with the buddies. ‘Yeah, my ‘side hustle’ brought in $7,000 in extra income last month…’ Nice.

Maybe even nicer than that super awesome big black pickup. The real deal vs the faker.

If you are reading this and are broke, I would bet that you don’t like being broke. Just a guess. So, I challenge you to find your emotional connection that will allow delayed gratification – finding deals that are brag-worthy, saving money and watching it grow as you reach new savings goals, or building more revenue from a business; or another that is deep in you and is a greater emotional drive than the shiny new thing, bought today, but with money you don’t have.

Then act on that emotional drive. And let it build until that emotion overshadows the emotion of the new thing, right now. That black pickup is a few years old now. And it is going to look pretty plain, maybe even old, when his buddy pulls up next to it in the new Tesla Pickup/Mars Rover – especially if his buddy paid for the Tesla from cash he saved or built up in the side hustle business he successfully has built.