Editor’s note: This article was first published in August 2022. The annual household incomes of 18,000 and 30,000 euros it cites are 2022 figures for Spain, given without a source.
Everyone wants to be financially free, but not everyone will get there, because they lack a few basic traits that the people who do succeed have in common. As we always say, to build wealth or achieve financial freedom you need to work on your mindset before getting down to the finances themselves, because your personal development matters more than your so-called financial skills.
The good news is that anyone can achieve financial freedom, whatever their income, as long as that income clears a certain minimum threshold. So what separates financially free people from the financially inept? Why do some families make ends meet on less than €18,000 a year, while others struggle on more than €30,000?
No single trait determines who will become financially free and who won’t, but we can almost guarantee that people who lack certain characteristics will end up in financial trouble sooner or later. Let’s look at some traits of people who are more likely to achieve financial independence, even while earning less than others.
The 8 traits
1. They don’t need to impress anyone
This may well be the greatest quality a person can have these days. In a world where everyone competes to show how well life is going, most people are constantly buying things to look wealthy. Someone who is insecure will need to spend more money to look like something they’re not. And as we always say, the habit of spending to keep up appearances costs you money you could use not to seem, but to be.
A self-confident person, on the other hand, feels no need to buy things to impress. They know who they are and, above all, they know what they’ll have down the road by steering clear of this trend of keeping up appearances.
2. They pay attention to the little details
People with a financial-independence mindset always know how much they earn and how much they spend. They also know that a small leak can sink a great ship. As we always say, you can’t manage what you can’t measure, so keeping close track of your finances will stop you from buying something you can’t afford. And remember: in personal finance, money not spent is exactly the same as money earned.
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3. They know debt affects their financial future
We already know there’s good debt and bad debt. Any debt that isn’t taken on to invest in something that will give you a return on capital counts as bad debt, except for the mortgage that’s necessary in some cases, and always after working out whether it’s better to buy or rent a home.
We’re talking about bad debt: a form of indentured servitude in which we give up part of our money in exchange for instant gratification. The health of your personal finances basically comes down to two metrics:
- The passive income you receive from your assets
- Your level of debt
Any sensible investor is wary of putting money into a listed company with high debt, because they know debt is a cancer for a company. It is for a family too.
4. Financially free people are pragmatic
More often than not, pragmatic people tick all the previous boxes: they have no debt, and they have a very clear, well-defined idea of who they really are. Put another way, they understand what value means.
A pragmatic person knows that a car is a tool for getting from point A to point B, and that it loses value fast. So if a €5,000 car does the same job as a €30,000 car, only a fool would pay €25,000 more for something that does the same thing. The rest is just trimmings. They see clothes the same way. This keeps them closer to financial freedom.
5. They live within their means, but they do live
Someone with the financial-independence trait isn’t a hermit or a monk, but they take pride in being truly happy without splurging. They live within their means and save in good times to prepare for rainy days. Many people forget that lean times come to almost all of us sooner or later, however unlikely that may seem. Just pray you’re debt-free when the rainy days arrive.
There are three ways to improve your personal finances:
- Increase your income
- Cut your expenses
- Increase your income and cut your expenses
The person closest to financial freedom undoubtedly goes for number 3. Trying to reach financial freedom simply by cutting expenses is a bad idea, because it leaves very little room to maneuver: there’s a limit to how much money you can save, but no limit to how much you can earn.
6. Financially free people are patient
When it comes to money, patience is the quality most people lack. I suppose that’s why you’ll never see the hype merchants advertise “Get rich slowly over the long term.” Most people want results fast, and fast is how they end up crashing. Add up decisions and choices one by one, day after day, week after week and year after year; after a few years of financial discipline, add compound interest, and you’ll be well on your way.
See also: The ultimate guide to protecting your money from inflation, and where to invest to beat it
Patience also helps them when they shop. If they want something and don’t have the money, they’d rather wait. Other people would reach for credit straight away.
7. They know what matters in life
It may sound contradictory, but in their pursuit of financial freedom these people know that the secret to happiness isn’t money. They aren’t materialistic. Expensive toys may bring luxury, but at what price? Financially free people know that life’s greatest joys don’t come from impressing the first idiot you meet, but from spending quality time with the people you love and who love you. And, indirectly, this is what ends up bringing them financial freedom.
8. They believe in personal responsibility
Although I’ve left it until last, this may be one of the most important points. People who will one day be financially free know that it depends on them and nobody else. They know they’re responsible for their own lives, so they don’t blame anyone for their situation.
They know that earning more money is their responsibility. So is saving. They also know that disasters can strike and turn your finances upside down, but they’re aware that when that happens, it’s up to them to keep going and carry on with what they were doing. Remember: if you don’t accept that you’re responsible for your own life, you’re leaving it in other people’s hands. And that’s not a good deal.
Further reading
Featured image: Garry Knight, CC BY 2.0, via Flickr.
