The Mindset of the Wealthy

There are a number of ways in which the wealthy differ from the poor, or even the middle class. When I refer to the wealthy, I’m not talking about super-wealthy celebrities like Donald Trump, Beyoncé, or Peyton Manning. I’m referring to the simple multi-millionaire, a status anyone with a physician-like income can achieve eventually with a reasonable amount of hard work, discipline, and planning. Perhaps the most significant difference between a physician destined to remain poor and one who will become a multi-millionaire is mindset. The wealthy, and those destined to become that way, (often referred to as HENRYs- High Earner, Not Rich Yet), simply think differently from the majority of their peers in six distinct ways.

1. The Wealthy Think Long Term

More than anything else, those who are poor and will stay that way aren’t thinking about their life in 20 years or even five years. They’re thinking about Friday night, or worse, what they’re going to have for lunch. The wealthy, as a rule, are planners and started planning their retirement in their 20s when they received their first paycheck. When the middle class gets around to thinking about retirement, typically in their mid-50s, the wealthy are doing estate planning to try to figure out how many generations they can make their wealth last. When an automobile needs to be replaced, Middle Class Mike buys a new one on credit, because he didn’t realize that car would need to be replaced someday. Wealthy Willy purchases the car with cash, with money he’s been setting aside for that purpose for years. When considering whether he can afford something, Poor Peter thinks, “What is the payment and how does that relate to my income?” or “How can I make the payment lower?” Rich Rick thinks, “What is the least expensive way I can acquire this item?” If it must be bought on credit, Wealthy Willy and Rich Rick figure out how to minimize the interest paid, or at least compare the interest rate to their expected investing returns.

2. When Spending, the Wealthy Focus on Quality and Happiness

When a wealthy person purchases an item, he focuses on its quality more than its price. It is not simply “If you have to ask, you can’t afford it.” He has learned that a quality item will often be less expensive in the long run because it will last longer due to its superior craftsmanship. More importantly, he has a priori determined how to spend in a way to maximally increase his happiness. Once he has decided that a nice car will make him happier than a new boat or a vacation or retiring earlier, he saves up for and purchases the nice car. He derives pleasure from the entire experience—saving up and anticipating the purchase, making the purchase, and using the purchase afterward without having to worry about making future payments for it. It isn’t that wealthy physicians don’t spend, it is that they spend deliberately.

3. The Wealthy Have an Ownership Mentality

As a general rule, the wealthy prefer to be owners, rather than employees. An employee’s income is always capped at his salary, but a business owner has infinite income potential. A business owner never pays an employee more income than he can generate. If he did, there would be nothing left over for profit. When a business does particularly well, those who own it derive the benefit. When it does poorly, the owners do poorly. But so do the employees, since they lose their job. All the downside and none of the upside. Likewise, the wealthy prefer investments where they function as owners. This means investing in their own businesses and those of other people, whether privately owned or publicly owned (i.e. the stock market). They also invest in real estate, where they can collect (and increase) rent and benefit from appreciation. They invest, rather than speculate, holding their investments for decades rather than hours. Meanwhile, the poor invest in bank accounts, CDs, and similar investments, if they invest at all.

4. The Wealthy Focus on Providing Value to Others

It is almost a universal rule that a successful business owner is far more focused on his customers than on his bottom line. He knows that if he provides value to others, the money will eventually take care of itself. In addition, after reaching a certain level of success, the marginal utility of additional income to the owner declines markedly. If he continues to work, he does it because he enjoys helping others and building something of value. It truly isn’t about the paycheck every other Friday, and that focus on others breeds even more success.

5. The Wealthy Put Themselves in a Position to Take Risk

While it is true that the wealthy are often far more willing to take significant risk in their careers and with their investments than the poor or middle class, they are also experts at getting themselves into a position where they can afford to take that risk. They avoid consumer debt, like credit cards and auto loans. They minimized their educational debt, and paid it off faster than their peers. They live on a fraction of their income, allowing them to have cash continually available for additional investments. They minimize their fixed ongoing expenses through debt reduction and deliberate spending. They keep enough money in safe investments that they can afford to lose a job, start a business, or take care of a family emergency without having to tap long-term investments or retirement accounts. They also know their worth in the marketplace and are continually improving their skills and knowledge so they will be worth more each year to their clients and/or employers. Confidence breeds success which breeds even more confidence. In many ways, those destined to become rich literally will themselves to become wealthy through the power of focus.

6. The Wealthy Become Financially Educated

The rich learn how to speak the language of finance and investing. That doesn’t necessarily mean that the wealthy don’t use financial, accounting, or legal advisors. However, they know it is impossible to have an intelligent conversation with a financial professional if you can’t even speak their language. Inflation, depreciation, deductions, Roth IRAs, long-term capital gains, and other terms are all just simple vocabulary to the wealthy, but they might as well be Chinese words to most Americans. The wealthy pass this language on to their children, giving them a competitive edge in their schooling and careers.

The wonderful thing about all of these habits and knowledge is that no one is excluded from developing them. While there is plenty of income inequality in our society and undoubtedly factors beyond your control, a certain amount of your own financial success lies entirely within your control. Develop the mindset of the wealthy and achieve your financial goals.

Dr. Dahle is not an accountant, attorney, insurance agent, or financial advisor. He blogs as The White Coat Investor and is the author of the best-selling The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing.