Editor’s note: This article was first published in November 2015; the estimated fortune of 60 billion it attributes to Warren Buffett is a 2015 figure, and his net worth is much higher today.
It’s not about the money you earn, but about the money you manage to keep after earning it. In fact, contradictory as it may sound, money will not solve your financial problems on its own (it often makes them worse). To see this, you only need to look at the examples we gave of lottery winners who ended up broke, where we saw how a person can be a poor wretch even with 215 million euros, which, unsurprisingly, he ended up losing.
Wealth, like financial freedom, is above all a question of mindset. That is why, when we talk about financial education, we always explain that it is a profession in itself, one you must practise regardless of your job, and that it requires working from the inside out: from what you are to what you will have, and not the other way round.
If you think money isn’t important to you, money isn’t for you. And if you think money is a route to happiness, then money isn’t for you either, and you won’t find happiness however much of it you have.
In fact, money has no intrinsic value. What has value is everything you can get with it. And we’re not talking about material things, but about peace of mind, security and freedom: peace of mind that you will keep receiving an income to cover the basics; future security, knowing that even if you lost your main income you would have income from other sources; and freedom, in every sense, to do what you want to do.
But at any given time, you should be able to save at least 20% of your income (save it and invest it).
(See: What leads you to poverty, according to the author of “Secrets of the Millionaire Mind”)
What is the most common mistake people make when they start earning more?
The main problem seen in the finances of people who start earning more money is one of adaptation. Put simply, they adapt their lives to their new income. They do so, apparently, because they can afford it, but as we have said before, the fact that you can pay for something today does not mean you can afford it.
Earning more money boosts your self-esteem, and high self-esteem makes you more confident in yourself and in your decisions. This psychological fact explains the huge difference between someone who builds a fortune little by little and someone who starts earning more overnight, or receives a large sum from an inheritance, the lottery or a surprising jump in the value of a block of shares.
Both people have the same confidence in themselves and their decisions, with one difference: one of them has a false sense of confidence, because he is just as financially ignorant as he was before he made the money, so his decisions probably won’t be very smart. And most dangerous of all… the urge to show everyone else how well life is going for him (a sure-fire way to wreck your personal finances).
Our education system teaches us maths and many other subjects. University may even give us the knowledge we need to go out there and earn money, whether as a professional in a company or by starting our own business, but unfortunately we are not taught the basic pillars of financial education or the inner work our finances require.
Sometimes, before talking about money, we have to talk about people’s beliefs about happiness. Let me explain, because there are people who would only be happy if they could live the life of the owner of Playboy magazine. In short, and as we have said on several occasions, if you go looking for happiness, you will never find it, because happiness is not out there and has nothing to do with your possessions.
That is why many rich people say money doesn’t buy happiness, and yet very few people on the Forbes list feel unhappy with their fortunes. Why? Because they have a purpose in life. They are managers, business owners, creators of value; they generate jobs and, one way or another, make society better.
And to achieve financial freedom, you need a purpose above all else, because very few people get rich without a desire to create or build, or without being passionate about what they do.
Warren Buffett, Tony Robbins, Richard Branson, Bill Ackman… could retire tomorrow and live out what the middle class imagines would be a magnificent dream: travelling the world and lying on a lounger all day sipping mojitos while an islander fans them for 3 euros an hour.
But for them, that is neither happiness nor freedom. They call it boredom (an empty life), which explains why people who manage to fulfil that dream usually end up one of two ways: broke, after getting bored, drinking, taking drugs and gambling their money away in casinos… or, the smartest of them, going back to work, as the surfer guy did, and looking for a new purpose in life.
(See: Why being a billionaire turns into hell for the newly rich)
In the end, it’s not about money but about how we measure success
How exactly do we define success? We would get many different answers, but ultimately I think anyone can be brought to see that success is not measured by the money you have, but by the amount of time you spend doing what you really want to do.
That said, take two people, one with a fortune of 10 billion and the other with a fortune of 3 million: could we say for certain that the first is more successful than the second? In terms of wealth creation, certainly. But could we measure the day-to-day happiness of these two people? Clearly not.
We cannot compare one person’s success with another’s in economic terms, because it is a very personal measure, which could be answered like this:
If you are doing what you want to do, and it makes you happy, then you are successful right now. If you have financial peace of mind, security and freedom, then you will probably go on being successful in the future.
Now all we need is a way to measure our level of financial security, peace of mind and freedom.
As we explained in a previous article, the health of your personal finances is measured solely by the amount of money we receive from our assets, that is, the money that comes in without our having to work for it.
If that amount is not enough to cover your lifestyle, you probably don’t have long-term security or peace of mind.
Once that figure is where it should be and you spend your time on what you enjoy (which we hope isn’t just parties and drugs, and as long as you keep a purpose), you will be able to say you are truly rich: someone passionate about what they do, with several sources of income, and happy.
Ironically, Warren Buffett, with an estimated fortune of 60 billion, defined success along these lines: if the people you want to love you really do love you, that is success.
Further reading
- 10 ways the rich think differently
- 16 things that keep you from getting rich, according to the man who studied 500 millionaires
Featured image: Jennifer Kramer, CC BY 2.0, via Flickr.
