The Importance of Mindset in Wealth Creation

"Think and Grow Rich" - Napoleon Hill, Best Selling Personal Development Author

We all have met those people who appear to be rich, but who in reality are living pay check to pay check. From the outside these high rollers seem wealthy, but the same fancy cars and clothes that create the perception of wealth are what is causing these high earners from accumulating and building true wealth.   

Some may know Mike Tyson today as the unlikely star of the Hangover trilogy, more importantly Mike Tyson had an illustrious boxing career in the 80’s and 90’s. Mike Tyson earned significant income over the course of his boxing career, and his net worth is reported to have peaked at an estimated $300-$400 million, certainly enough for his kids, grand kids and future generations to live amazingly comfortable lifestyles.  Why is then that in 2010 Mike Tyson reported that he was “totally broke”, basically living pay check to pay check to cover his monthly expenses?  Sure, the boxing icon has been marred by drug and alcohol problems, criminal indictment, hangers-on and boxing’s most preeminent and controversial promoters’ Don King; but Mike Tysons’ inability to turn the income he earned over his boxing career into sustainable wealth most likely comes down to his lack of financial planning and self-discipline.

Contrast Mike Tyson’s story with the template Magic Johnson has created for other pro athletes to follow in managing their money.  The hall of famer former Lakers point guard made an especially important financial decision early on in his career, admitting to himself he knew nothing about business.  That is why he solicited counsel from successful power brokers that used to sit court side at the L.A. Forum.  Now he runs Magic Johnson Enterprises which has a net worth of $700M and interests in a promotional company, a nationwide chain of movie theaters and a movie studio; not to mention his ownership interest in the Los Angeles Dodgers.  

Unfortunately, there are far more Mike Tyson like stories than Magic Johnsons’ financial success story in the professional athlete universe.  Amazingly, over 78% of former NFL players have gone bankrupt or are under financial stress within two years after they stop playing and within five years of retirement.  An estimated 60% of former NBA players are broke.   ESPN even produced a 30 for 30 documentary about this unfortunate phenomenon called Broke. 

Are professional athletes that go broke so different than the average person that goes broke?  There are a lot of parallels. It is only the scale of the issues that are different.  So, we can learn a lot from these professional athletes to ensure we are translating the income we do earn into wealth that can give us the freedom to pursue our own, unique big-league dreams.

One of the primary reasons for far too many millionaire athletes ending up broke, revealed by the ESPN documentary Broke, was not taking accountability for their own financial well-being and trusting the wrong people to handle their financial affairs.  This is one definite parallel between the average investor and professional athletes, as many Canadians outsource their financial future to an unknown advisor.  Many people spend more time per year getting their hair cut than reviewing and maintaining their financial plan.  It’s amazing how little time we spend participating in the planning and ongoing management of something as fundamental to our well-being as our financial future, or how little time we spend vetting the professionals who are supposed to be the purveyors of this good fortune.

Financial advisors can add a lot of value to your financial success.  Just make sure you are diligent in your search and that you always remember: 

Nobody cares about your money and financial future as much as you do – nobody! Whether you decide to be a do-it-yourself investor or work with a financial advisor, if you want to build wealth it starts with you being the CEO of your financial freedom.

Building wealth starts with this mindset of being the CEO of your investment portfolio.  It’s not rocket science, but there is a commitment required on your end to turn this mindset into practice.  In my humble opinion, financial freedom is very achievable for the average person if you are willing to commit to these eight disciplines:

1. Start now on the road to money mastery and become an apprentice, learning from the best

By learning the tools, strategies and skills needed for managing money as early in life as possible you will become wealthier, faster. You can further build your knowledge base in many ways (reading investment books, taking basic investor courses, joining investment clubs) and it should be done over time – don’t expect to learn everything you need to learn about successful investing in a few months.

2. Begin saving and investing as early as you can to benefit from the power of compounding

Albert Einstein famously once said “Compound interest is the greatest mathematical discovery of all time”, and you can put this powerful math concept to work for your wealth accumulation by starting to invest early in life, no matter how small your contributions may be.  Compounding is the mathematical process where interest on your money in turn earns interest and is added to your principal.

Consider two versions of your investor self – one who starts investing early in life and one who waits until later in life. If you invest $10,000 at age 25, assuming a return rate of 7%, the investment would be worth $150,000 at age 65.  Alternatively, getting a later start at age 35 would result in growing the initial $10,000 investment to only $76,000 by age 65. That 10-year head start provides more than a doubling compounding effect on your principal investment– that’s a lot of cheeseburgers in retirement.  Time is a huge multiplier and financial lever. And, it’s never too late to get started.

3. Invest in yourself 

Your greatest source of income over the course of your life will be you and your career.  There is a high return on professional development investment you make in yourself.  Investing in yourself and your career offers income expansion, which can be leveraged to invest in your financial future.

4. Live within your means

This does not necessarily mean that you need to sacrifice your enjoyment of life. As outlined here, there are money saving practices that can be used without feeling any real squeeze. It is the difference between being cheap and being frugal.  What is needed is to be more strategic and frugal in your spending, while allocating a set percentage of your income automatically into an investment account.  This savings allocation will grow as your income inevitably increases as your career progresses over the years.

5. Invest within your limits  

Investing within your limits doesn’t just apply to how much money you invest, as it goes without saying you shouldn’t over extend yourself financially to invest in the stock market.  Equally important is to invest within the limits of your current investing knowledge base.  Although stocks can offer some of the best upside, it’s like playing Russian roulette with your financial future if you don’t know anything about investing in the stock market or why you are buying a stock.  If you aren’t interested in investing your time to learn more about the stock market currently, that’s totally understandable – there many more fun things in life to do.  However, you can still benefit from the capital growth benefits of the stock market and minimize your risk while doing it safely with Exchange Traded Funds (ETFs) and working with a financial advisor.  

6. Be disciplined  

Stick to safe and proven investment strategies, don’t be lured by making a fast buck by investing blindly in a “can’t miss stock” your friend tells you about over a latte.  

Be disciplined in your investing style, don’t let emotion play into your investment decisions.  Never buy on rumor, do your own research.    

7. Take the long-term view

Investing for the long term, versus short term trading, will let you ride out the unavoidable ups and downs of the market, stabilizing your average returns and mitigating the loss of capital.  

As we lengthen our investment horizon, the average annual rate of return over that timeline becomes less variable. Financial service provider Schwab.com studied the highest return, lowest return and average annual return of the S&P 500 over various holding periods from 1926. They found that as you move from a one-year holding period to a three-year, 10-year, and finally to a 20-year holding period, the number of negative returns experienced goes down. In fact, there’s never been a 20-year period with a negative return.

This means that the longer your time in the market, the more likely you’ll receive the long-term average annual rate of return.  Sure, investing in the stock market carries some risk, but by extending your time horizon as an investor you’re lowering this risk while stabilizing your likely return.  

8. Set Your Financial Goals 

Having clear financial goals is critical to keeping you motivated and committed long term to your plan for financial freedom. If they are going to truly motivate you, to cause you to stay on course with your savings goals and building your investor knowledge base, it’s critical you go beyond vague goals like – “I want to be a millionaire”.  It must touch on that life aspiration or human emotion that can motivate you, over the course of your working life, to go into overdrive in pursuit of an important goal.  For me, it includes securing financial freedom in life to pursue the sort of work that inspires and fulfills me, while providing an enriching life for my family.  Whatever financial freedom would inspire you to do – be it pursue advanced education, volunteer, travel the world, philanthropy, leave a financial legacy for your kids; choose your wealth goals carefully.  They are your goals and will help to keep you motivated on the journey.