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The stages of financial freedom: The road to financial independence

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Today we’re going to explore the six stages of financial freedom. First, though, I want to introduce you to my friends Mac and Pam.

Pam is a pathologist and an elite ultra-runner. Mac is a former high-school science teacher and current stay-at-home dad. Together, they form a formidable financial team.

They’re also a couple of nerds. I mean, look at them!

[Pam and Mac]

Maybe because they’re such nerds, Mac and Pam have always put an emphasis on saving. But they don’t just pinch pennies. They’ve optimized their lives to boost their income and their happiness. They’re well on their way to financial independence. In many ways, they epitomize the ideals espoused by my Money Boss philosophy.

The Money Boss Method in Real Life

When Pam was in her final year of med school, for instance, Mac worked as a research tech at a neuroscience lab. He brought home only $18,000 but they were careful to avoid living paycheck to paycheck.

“We would pay the rent,” Mac says, “we would put money into savings, and we’d still have money left over at the end of the month. We made choices not to buy the little things that could have killed our future.

After med school, Mac and Pam moved to Portland. While Pam did her pathology residency at Oregon Health & Science University, Mac taught high-school science. At that time, their salaries were similar.

When their first child was born in January 2005, Pam took maternity leave until Spring Break. From Spring Break until the end of the school year, Mac brought the baby with him to work and placed her in the student-run daycare.

“Counting the cost of daycare, my teacher’s salary went down to minimum wage,” Mac says. At the end of the school year, he asked for a year off. That year turned into forever. “It came down to whether I wanted to raise other people’s kids or whether I wanted to raise my own.”

The traditional choice is for the mother to stay home with the kids, but that seemed silly in their situation. With her residency completed, Pam could earn four or five times what Mac could make as a teacher. “It didn’t make sense to throw away the money we spent on Pam’s education to not reap the benefits of that education.”

For the past decade, Mac and Pam have worked in tandem toward family and financial goals. Pam makes the money. Mac takes care of two kids and day-to-day household operations while also managing their investments. They’re both careful with spending.

“We spend a lot less than all of our friends who earn similar amounts,” Mac says. “Lots of our doctor friends have multiple houses. They own fancy cars. They spend lots of money and we don’t. Neither of us wants a second home. I drive a 2007 minivan and Pam drives a 2004 Avalon. Our only debt is our house. We pay off our credit cards every month and we have no car payments.”

From the beginning, saving has been a priority for Mac and Pam. And as they earned more, they saved more. It’s true their spending increased too, but at nowhere near the same rate. A higher income meant they could put more in the bank — not buy more stuff.

Because they’ve been so diligent for so long, Mac and Pam will be able to retire in their forties. They’ve made the choices and done the work necessary to achieve Financial Independence at a young age.

“We’d rather accumulate our wealth, to live how we want later in life than spend on things now,” Mac says. Yes, they could afford to buy things today, but doing so would require sacrificing more important opportunities tomorrow.

These two are money bosses! They’ve been climbing the ladder of financial freedom for a long time.

[The Smith Family]

The Six Stages of Financial Freedom

I used to believe that financial freedom meant just one thing: Having enough money that you never had to work again. Over the years, people like Mac and Pam have taught me that financial independence exists on a continuum. It’s not “all or nothing”, but an ever-increasing range of options. It’s a process.

Each stage of financial freedom allows you greater autonomy and self-expression, and these are qualities that lead to happiness.

Nearly a decade ago, I came up with what I called the three stages of personal finance. Later, I expanded this to four or five stages. Today, I recognize there are many degrees of financial independence.

For our purposes, we’re going to keep things simple.

After blending my ideas with those of Joshua Sheats at Radical Personal Finance, I’ve come up with a model that tracks six stages from financial dependence to financial abundance.

But before you can begin progressing through the six stages of financial freedom, there’s a preliminary hurdle you have to clear. You’re in this “zeroeth stage” if your expenses exceed your income.

Stage 0 – Dependence

In this stage, your lifestyle depends on others for financial support. We all start here. We’re born this way. How long it takes to break free varies from person to person. You’re in this stage if you rely on financial support from your parents. You’re in this stage if you spend more than you earn. You’re in this stage if your debt payments exceed your income.

After you begin to earn a profit, you begin to progress through the six stages of financial freedom. The first three are the “surviving” stages.

Stage 1 – Solvency

Solvency is the ability to meet your financial commitments. You reach this stage when you no longer rely on anyone else for financial support — when your income exceeds your expenses, when you are no longer accumulating debt. When you are earning a profit, you have achieved solvency. Some people reach this stage in their teens. Some never reach it. (I reached it at age 35 in October 2004, when I stopped debting and began to repay what I owed.)

Stage 2 – Stability

You achieve stability once you’ve repaid your consumer debt, established some emergency savings, and continue to earn a personal profit. You may still possess some “good debt” — college loans, a mortgage — but you’ve eliminated other obligations and built a buffer of savings to protect you from unfortunate events. (I reached this stage at age 38 in December 2007, when I made my final debt payment.)

Stage 3 – Agency

The final “surviving” stage is free agency, the ability to work and live how and where you want. In this stage, you’ve eliminated all debt (including student loans and mortgage) and you have enough banked that you could quit your job at a moment’s notice without hesitation. This is commonly called “screw-you money”. (I achieved agency in March 2008.)

Note: I know first-hand there are times you might prefer to carry a mortgage even if you don’t have to. For the purposes of this stage, if you have enough saved and invested to pay off your mortgage, it’s the same thing as not having one.

In the final three stages, you move from surviving to thriving. Money is no longer a safety net, but a tool to help you build the life you envision for yourself and your family. Remember our discussion of the “crossover point” earlier this week? That concept is key to defining where you are in these latter stages of financial freedom. (Each of these stages assumes no debt. Or, as explained in the note above, enough cash on hand to instantly repay your debt.)

Stage 4 – Security

You achieve financial security when your investment income can cover your basic needs. That is, based on how much you have saved and invested, you could live a meager existence for the rest of your life. Even if you never worked another day in your life, you have enough to afford simple housing, basic food, essential clothing, and insurance.

Stage 5 – Independence

Financial independence is the ultimate goal for most folks. At this stage, your investment income is sufficient to fund your current standard of living for the rest of your life. You can afford the basics, but you can afford some comforts too. You have Enough. (I leaped from agency to independence in April 2009. This is the stage I’m in today.)

Stage 6 – Abundance

In the final stage of financial freedom, you have “enough — and then some”. Your passive income from all sources will not only fund your lifestyle indefinitely, but grant you the freedom to do whatever you want. You can share your wealth with others. You can indulge in luxury, explore the world. You can build a business empire.

Note: Where am I on this scale? I’ve definitely achieved Financial Security. If you’d have asked me a year ago, I would have told you that I was solidly in stage five, Financial Independence. Honestly, that’s probably still accurate — but a lot about my financial situation seems less certain than it did a few months ago. That’s a topic for another conversation…

The more money you save, the more freedom you have, and the greater risks you can take. As your financial independence increases, you chip away at the wall of worry. You’re able to make decisions based on happiness and not on dollars.

And here’s the thing: As you develop smart money habits and skills, these will not only help you obtain whatever immediate level of financial freedom you’re working toward, but also progress toward future levels of freedom.

If you’re working toward debt freedom, for instance, as you learn to spend less and earn more, this profitability will continue to help you once you’ve achieved solvency. You can apply the same ideas as you work to obtain stability, and then agency.

I spent far too long this morning playing in Photoshop to create the summary below. I am not a graphic artist…but I try.

[The Stages of Financial Freedom]

Summing Up

That’s it for migrating the Money Boss crash course to Get Rich Slowly!

Over the past few weeks, I’ve shared the nuts and bolts of my financial methodology. To summarize:

  • You are the boss of you. Nobody cares more about your money than you do, so assume responsibility for your financial future. Run your life like a business.
  • The best way to get what you really want is to become clear on your goals and values. That’s why everyone should craft a personal mission statement.
  • Your saving rate is the most important number in personal finance. Savings — which I like to think of as “profit” — gives you the power to do what you want in life.
  • Frugality is the cornerstone of wealth-building, but the best way to spend less is to cut back on the big stuff.
  • You are 100% responsible for your income. To earn more, learn more. Work more and work better. Sell yourself. If you take the time to supercharge your income, your profits will soar.
  • Think like a billionaire by carefully guarding each dollar you earn. Recognize that every time you spend today, you’re sacrificing a piece of tomorrow. Be wary of opportunity costs. Practice mindful spending.
  • Invest wisely. Don’t try to get rich quick. Develop an investment philosophy and develop an investment strategy that supports this philosophy.
  • Use barriers and pre-commitment to automatically do the right thing — every time.
  • As you adopt this philosophy, your wealth snowball will begin to grow. The more you work at it, the bigger it’ll get. Protect it. Your wealth snowball is the key to your financial future. Eventually, you’ll reach the crossover point, that place where your investment income exceeds your day-to-day spending. You’ll have achieved Financial Independence.

It was a lot of work to put this together, but it was also a lot of fun. I’d love feedback if you have it. I want this info to be as useful as possible to future readers, so drop me a line to let me know what you liked — and what you didn’t. Constructive criticism will not offend me.

I’ve collated this series of articles into a free ebook called A Brief Guide to Financial Freedom. Like much of this material, it’s still branded for Money Boss, but soon I’ll revise everything to be GRS-specific.

The post The stages of financial freedom: The road to financial independence appeared first on Get Rich Slowly.

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amijangos
3 days ago
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Columbus, Indiana
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Eight Amazing Things That Happen When You Finally Pay Down Debt

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Living with debt may be seen as “normal” these days, but the damage debt does to our lives is far from okay. After all, carrying too much debt can cause more than budgeting problems; it can stress and personal problems, too.

Experts at Psychology Today say that that your mental health and financial health are irrefutably intertwined. People in debt are more likely to drink and abuse drugs, and there is a distinct correlation between high debt levels and increased risk of suicide, they note. A study from Clinical Psychology Review even showed that indebted consumers are three times more likely to suffer from a mental health condition.

And what about how debt affects your dreams? Carrying too much debt can put your goals out of reach – or even out of mind, since you know you can’t afford them. When you’re deep in debt, you may never take the vacation you’ve dreamed of, purchase the home you’ve always wanted, or have the cash to pursue the hobby you love. You may have to turn down exciting but low-paying opportunities while you toil in service of your debts, or wind up working forever — even until the day you die. That means that debt could be the reason you never actually retire — or at least never have a retirement you can afford to enjoy.

Eight Ways Life Changes After You Pay Off Your Debt

Everything you’ve just read may be depressing, but it’s true. While it’s easy to buy now and pay later, few people are aware of the effect debt makes on their lives until it’s too late. Of course, debt isn’t a death sentence — or, at least it doesn’t have to be. No matter how helpless your situation feels or how much debt you have, it’s possible to turn things around and make dropping debt a priority.

While the road out of debt won’t be easy, there are benefits waiting for you at the very end. And, those benefits extend far beyond the relief you’ll feel when you make the final payment on your credit cards, student loans, and personal loans; some of the benefits of becoming debt-free are so huge they can change your life forever.

If you’re working your way out of debt and wondering what’s in store in the future – and whether it’s worth the sacrifice – here are some things you can to look forward to.

#1: You have a lot more money to spend, save, or invest.

Paying down debt requires a huge commitment of money and time. Whether you choose to utilize the debt snowball or debt avalanche methods or just pay whatever you can each month, most of your expendable income needs to go toward debt repayment if you want your actions to count.

But, something crazy happens the second you make the final payment toward your debts. All of a sudden, all the income you’ve been throwing toward your debts each month becomes yours. With no more debts to pay off, you get to experience what your paycheck actually feels like without the burden of debt payments every month.

As a result, you’ll have a lot more money to save, spend, or invest going forward. At first, you may even feel rich!

#2: Getting a good night’s sleep becomes easy.

The burden of debt may take more of a mental toll than you think when you add up all the worry, stress, and sleepless nights your debt has caused. Especially at the beginning of your journey, it’s likely you struggled financially and emotionally before building up the courage to change your spending habits and your life.

When you pay down your debt, all of that changes. All of a sudden, you no longer have to worry about insurmountable balances, looming due dates, and relentless interest charges. Without any debts to worry about, your monthly expenses will drop, freeing up your personal cash flow and allowing you to focus on savings and daily living expenses.

Few people understand just how free you can feel when you’re no longer beholden to a slew of banks and lenders. But, when you get there, you will instantly feel the power the comes with that freedom.

#3: Your credit score may improve.

The amount you owe on your debts in relation to your credit limits, also known as your credit utilization, accounts for 30% of your FICO credit score. Because of this, your credit score has the potential to improve with each monthly payment you make.

And, since your payment history is the biggest determinant of your credit score, your regular monthly payments will also help boost your score over time.

#4: You can dream up new financial goals.

Getting out of debt can take years, depending on how deep of a hole you’re in, and the process itself takes self-discipline and courage. During your journey, you likely kept your head down and focused on your goal. After all, too much distraction can cause you to get off track or fall back into bad habits.

When you’re finally debt-free, however, your journey comes to an end. And while it can almost be disorienting to stop working toward this goal you’ve held for years, after all your hard work, you can finally come up with new dreams that are a lot more fun than paying off old debts.

Maybe you want to retire early, or perhaps you want to help your kids save for college. Maybe you’re finally ready take that family vacation you’ve been dreaming of for what seems like forever. Heck, maybe you just want to sit back and enjoy the peace that comes with being debt-free for a while.

Whatever you really want out of life, becoming debt-free will help you get there faster. Without a ton of bills to pay each month, you can finally save for what you want and pay for it in cash.

#5: You can work less if you want.

A lot of people make huge changes to finally pay off debt, and often those changes include picking up a second job or side hustle. Maybe you’ve been driving for Uber on the weekends to earn more money for debt repayment. Or, you might have picked up some seasonal work, babysitting, or lawn mowing jobs.

No matter your hustle, paying off debt means that you may not have to work quite so hard anymore. If you’re been putting in more hours than you really want to just to pay down debt, reaching your goal may mean it’s time to work less and enjoy life more. Chances are, having the freedom to work less is one of the reasons you decided to get out of debt in the first place.

#6: You have more options.

In addition to not having the option to work less if you want, paying down debt makes it possible to change your life in myriad ways. Maybe you wished you would change careers but couldn’t afford to take a pay cut in the past, or perhaps you want to go back to school to finally finish your degree.

Maybe you want to cut down to part-time work to spend more time with your kids. Whatever it is you want, becoming debt-free means you now have less financial obligations, and more options than ever. Without all your old bills hanging over your head, you can build the life you want instead of the life you had.

#7: Debt becomes something you strive to avoid.

When you’re already in debt, it’s easy to think that adding to the pile won’t even matter. What difference will another credit card or a new car loan make when you’re already struggling as it is?

When you finally become entirely debt-free, you realize that it does matter how much you owe every month. Each bill may not seem like a lot on its own, but the sum of all your debts can make your life harder in too many ways to count.

Once you’ve spent years paying down debt, chances are good you will never want to go down that road again. As a result, you will likely do anything you can to avoid debt like the plague it is. And, if that means spending less and living more frugally, so be it.

#8: You get to finance your own dreams interest-free.

The final benefit of becoming debt-free is one that may not sound exciting until you actually get there – eventually, you will get to finance some of your dreams in cash.

That living room furniture set you’ve always wanted? Imagine walking into your local furniture store and writing a check to pay for whatever you wanted. Need a new car? Imagine having the savings to negotiate a cash price then driving off the lot with your new ride and no car payment to look forward to.

And, how about retirement? Imagine having enough extra money that you can boost your retirement savings without it hurting your bottom line, then retire earlier than you ever dreamed.

The Bottom Line

These are just some of the things you can do if you pay down debt, but there are endless other scenarios to consider. When you’re finally debt-free, you get to design the life you want instead of enduring a life that was built to keep up with endless bills.

If you’re ready to become debt-free or in the throes of a debt repayment plan, it’s crucial to keep your eye on the prize and remember what your life will be like when you reach your goal. There’s so much more to life than debt and “stuff,” and it’s hard to enjoy the spoils of your hard work when all your money is going to somebody else.

You get to decide how you want to live your life. Become debt-free, and you get to call all the shots.  Spend your life in debt, and your labor will always belong to someone else.

Holly Johnson is an award-winning personal finance writer and the author of Zero Down Your Debt. Johnson shares her obsession with frugality, budgeting, and travel at ClubThrifty.com.

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The post Eight Amazing Things That Happen When You Finally Pay Down Debt appeared first on The Simple Dollar.

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amijangos
4 days ago
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Great Feeling!
Columbus, Indiana
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Turkish Delight

7 Comments and 15 Shares
I take it Narnia doesn't have Cinnabons? Because if you can magic up a plate of those, I'll betray whoever.
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amijangos
4 days ago
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Turkish Delight
Columbus, Indiana
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5 public comments
zippy72
7 days ago
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Is his the real thing or Fry’s? Because trust me, there’s a BIG difference...
FourSquare, qv
satadru
9 days ago
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hahahaha
New York, NY
Ferret
9 days ago
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So true.
alt_text_at_your_service
9 days ago
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I take it Narnia doesn't have Cinnabons? Because if you can magic up a plate of those, I'll betray whoever.
kyounger
6 days ago
whomever?
rraszews
9 days ago
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This is a common reaction, especially from people who aren't British. It's a World War II thing; privation in England during the war was so bad that children would betray their families for a confection that basically tastes like snot dusted with powdered sugar. (The fact that Tolkien and Lewis were both writing in the wake of WWII food rationing is why modern high fantasy has such a rich tradition of Food Porn scenes)
ericprasmussen
9 days ago
That makes sense, but how do you account for GRRM's voluminous food porn?
pmac
9 days ago
Oh! That's fascinating. I always wondered about that. Authors like George RR Martin also love talking about what people are eating and wearing.
rraszews
9 days ago
A lot of it is that later writers who hadn't lived through rationing grew up reading Tolkien and Lewis and so saw opulent feast scenes as "Just a thing you do in fantasy novels". JK Rowling included scenes like that in Harry Potter too, even though she's too young to have experienced it for herself.
artmoney
9 days ago
Rowling may not have experienced war rationing, but she did live in poverty and on assistance for long stretches of time.
mareino
9 days ago
I suspect George RR Martin is one of those people who are genetically cursed to be hungry all the time.

Everything You Need To Know About Emergency Funds

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You’ve probably heard the term “Emergency Fund” tossed around so many times that you’re getting sick of it. You’re probably especially getting sick of it if you don’t have one, because you feel like it doesn’t apply to you. But that’s where you’re wrong — it really truly applies to you. We talk about emergency […]

The post Everything You Need To Know About Emergency Funds appeared first on The Financial Diet.

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amijangos
11 days ago
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Columbus, Indiana
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Mastering the abundance mindset (and changing your money blueprint)

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Old habits die hard.

When you get to be a middle-aged man like me, you have forty-nine years of learned behavior to guide your actions and decisions — even when you know your choices aren’t necessarily for the best. Our mental blueprints (including our money blueprints) are deeply ingrained and tough to change.

Don’t worry. I haven’t turned into a spendthrift or anything. But I’ve been thinking a lot lately about how certain parts of my past continue to affect me, sometimes in huge and annoying ways. For instance, I fight an ongoing battle against a scarcity mindset. I haven’t been able to master the abundance mindset.

Mastering the abundance mindset is a key part of pursuing financial freedom

Scarcity and Abundance

I’ve been reluctant to talk about scarcity and abundance because the terms have been co-opted by “Law of Attraction” types who use them to encourage magical thinking. I hate the New Age-y approach to these concepts. I want to discuss them from a psychological perspective.

  • With a scarcity mindset, you believe that everything is limited. Time is limited. Money is limited. Love is limited. This causes you to worry about the future. You’re consciously or unconsciously more concerned with what might go wrong than with what could go right. You make fear-based decisions. You’re afraid of missing out. You’re afraid of not having enough. You have trouble with moderation and often exhibit “all or nothing” behavior.
  • With an abundance mindset, you believe there’s plenty for everyone. There’s plenty of wealth, prestige, and happiness to go around. You’re optimistic about the future. You think things will work out even if there are bumps along the way. You make decisions based on the Big Picture rather than a single snapshot in time. It’s easy for you to balance tomorrow and today.

I’ve written before about my trouble with impulse control. In the past, I’ve had problems with overspending, overeating, video game addiction, alcohol consumption, and borderline hoarding behavior. (I’m a compulsive collector of Stuff.)

All of this — the collecting, the addictive tendencies, the lack of self-control — stems from a scarcity mentality. But I didn’t realize it until a few years ago when my therapist helped me see the source.

Because my family didn’t have much when I was young, I find it difficult to defer gratification. My default mindset — even when life is grand — is that if I want something and it’s available, I should get it now. Somewhere deep inside, I feel as if there won’t ever be another chance. My father had this mindset. My mother had it. My brothers have it too. (Like me, Jeff and Tony have both learned to fight the feeling of scarcity in their own fashion.)

A Real-Life Example of the Scarcity Mindset
Over the past year, my deeply-seated scarcity mindset has begun to manifest itself in another annoying way.

Since moving into our new house last July 1st, we’ve had to make tens of thousands of dollars worth of repairs. About $56,000 of these costs came from the sale of our previous home, but that still leaves us on the hook for $30,000 or $40,000. We have one last project to do before we believe we’re finished: We want to replace the rotting back deck and install a hot tub. (This was the first project we had planned to tackle when we moved in, but we had to put it off for more pressing priorities.)

Kim and I know without a doubt that we’ll use the deck and hot tub nearly every single day of the year. (TMI: Currently, she and I both take several hot baths each week. If we had a hot tub, we’d be able to soak together.) It’s not a question of whether we’ll get value from building an outdoor oasis. No, the problem is that I’ve reached some sort of mental breaking point.

I’m reluctant to spend another penny on home improvement. I’ve over it. I hate the idea of cashing out yet another chunk of my index funds. Hate it, hate it, hate it. I feel like that’s money I’ll never get back. (I feel this way despite the intellectual understanding that we’d recoup maybe 80% of our costs if we were to sell the home in the future.)

I recognize that this is my scarcity mindset kicking in, yet I cannot shake these feelings. They’re a part of my money blueprint.

Here’s the thing: In so many ways, financial freedom depends on casting aside this scarcity mentality and embracing an abundance mindset instead. Financial well-being is fundamentally tied to positive expectations of the future.

Let’s look at three ways the scarcity mindset can manifest itself — and how to embrace abundance instead.

Jealousy and Spite

For some, the scarcity mindset manifests as jealousy and spite. These folks resent the success of others, financial and otherwise. They find it tough to be happy when something good happens to a friend or family member. They’re territorial, reluctant to co-operate toward a greater common good.

Here’s how Stephen Covey describes this flavor of scarcity in The Seven Habits of Highly Effective People:

People with a scarcity mentality tend to see everything in terms of win-lose. There is only so much; and if someone else has it, that means there will be less for me.

This type of scarcity mindset is the source of the average American’s love-hate relationship with wealth. Most people want to be wealthy — but are suspicious of those who already are. They typical person believes that when she makes money, it’s a result of hard work and skill. But others who get rich? They’re lucky jerks who don’t deserve it.

People with this form of the scarcity mindset don’t just hold back themselves but they keep down the people around them. This usually manifests as gossip and griping. Sometimes these people “keep score”. In extreme cases, they actively work to sabotage the success of others.

People with this type of scarcity mindset are a drag on life, a net negative to the world at large.

What if you suffer from this sort of scarcity mentality? Train yourself to be happy for others. Recognize that my success does not diminish you. Life is not a zero-sum game. To that end:

  • Don’t compare yourself to other people. Focus on yourself, on your own goals and accomplishments. If you must compete, compete with yourself. Strive for constant self-improvement.
  • Practice a win-win approach to life. Look for ways to improve your own situation while also helping those around you. When faced with a conflict, don’t try to be the “victor”; instead, work toward a solution beneficial to both parties.
  • Teach yourself to share. Force yourself to give things — time, money, resources — to other people. When you have a surplus of something, spread the love. (More on this later.)

Jealousy and spite can be overcome, but it takes work. Making the effort is a great way to change your outlook, creating a better life for yourself and the people around you.

Never Enough

For some who grew up deprived, the scarcity mindset manifests itself as an inability to spend -- even when it's okay
For others, the scarcity mindset manifests as fear of the future. These people think and act like children of the Great Depression. They’re so worried about how bad things could get that they’re unable to recognize and enjoy what they already have — even when they have a lot.

Let me give you an example.

I once met with a woman who had over $6 million in the bank. She was my age — mid forties — and lived a modest lifestyle. She wasn’t overly frugal, but she didn’t spend a lot either. Plus she had just landed a job that paid half a million per year. Nice position to be in, right? Not to her. She was scared to stop working because the didn’t want to run out of money.

Based on standard assumptions about inflation and stock market returns, this woman could probably spend $240,000 per year for the rest of her life and still die rich. (That’s without taking into account her new $500k per year position!) Her spending was closer to $50,000 per year, yet she fretted about not having enough.

Other folks are more extreme. I’ve known retirees who have millions in the bank but who are so frightened of the future — inflation! peak oil! stock market collapse! — that they won’t spend on needed home repairs and health concerns. What good is all of that money if you’re dead or your house falls down around you?

These folks aren’t harming anyone else (at least not directly), but they’re doing severe damage to their own well-being. They sacrifice happiness today in order to have more tomorrow — but they never enjoy tomorrow.

People with this type of scarcity mentality never have enough. No amount of money will allow them to sleep soundly at night.

What if you feel like you’ll never have enough? Unlike those who suffer from jealousy and spite, you should keep score. Do this in two ways:

  • First, keep a journal — a standard daily diary. It doesn’t have to be detailed. Write down the most important events from your life. And every day note at least one thing for which you are grateful. At the end of each year, go back and re-read what you’ve written. (This exercise will increase in value the longer you keep at it.)
  • Second, track your net worth and spending. Know how much you have and how much you need. Remember this rule of thumb: For every $25 you’ve saved, you can probably spend $1 each year without worry. (If you’re really nervous, you might change that to $1 for every $30 or $40 saved.)

If you have more than enough stashed away and still fret about the future, force yourself to spend. I’m dead serious. Pick something you’ve always wanted to do or have, and go get it. Money is a tool to build a better life. If the tool sits unused, what’s the point?

Instant Gratification

Finally, there are the folks like me, people who find it tough to wait for what they want. We’re “shopaholics” and compulsive spenders. With our flavor of the scarcity mindset, we’re so skeptical about tomorrow that we enjoy too much today. We want it all and we want it now.

A decade ago, when I still struggled with money, I had nothing saved. No retirement, no nothing. What I ought to have been doing was paying down my debt and building a foundation for the future. Instead, I was spending everything I earned on books, comics, and computer games. It never occurred to me to wait. I wanted things now, so I bought them.

As I mentioned at the start of this article, my therapist helped me to understand that growing up poor had given me a loathing of uncertainty and an inability to delay gratification. My money blueprint was largely constructed around a fear of missing out. During my transition from spendthrift to money boss, I learned to put off potential spending. I learned to wait for the things I wanted.

Like the last group, people with this sort of scarcity mentality never have enough. But the lack manifests in a different way. Instead of needing more money, we need more Stuff. We buy and buy and buy and are never satisfied. There’s no amount of possessions that will make us happy.

What if a feeling of scarcity drives you to always want more? Practice the art of deferred gratification. I learned this skill by using the 30-day rule. Here’s how it works:

  1. When you see something you want, make a note of what it is, where you saw it, and how much it costs. But don’t buy it yet.
  2. Over the next 30 days, be on the lookout for free or cheap alternatives. Does the library have that book? Can you borrow that tool from a friend? Could the local thrift store have a similar shirt?
  3. At the end of 30 days, if you still want the item then consider buying it. In most cases, however, you’ll find the urge to purchase has passed.

Also practice moderation. Recognize that most things in life don’t require an “all or nothing” approach. You can have some, and that’s okay.

Finally, keep a gratitude journal. The fundamental problem with this type of scarcity mindset is not appreciating what you already have. Force yourself to catalog the good things in your life.

From Scarcity to Abundance

A scarcity mindset leads to self-defeating behavior. It sabotages your chances for future financial success. Even when a Depression-type scarcity mentality helps you accumulate piles of cash, you’re unable to enjoy it. You’re afraid to.

Fear is always at the heart of scarcity: fear of failure, fear of the future, fear of missing out. Those with a scarcity mindset cling to the notion that there’s a limited amount of everything, and they’re afraid they won’t get their share. We’ll talk more about fear (and overcoming it) next week. For now, you should recognize that in order to achieve financial freedom, you must adopt an abundance mentality.

If you’re worried about lack, you aren’t free.

To get what you want, give what you want

I’ve already suggested several ways to fight specific flavors of scarcity. To finish, let’s look at a technique anyone can use to move from scarcity to abundance: To get what you want, give what you want.

What do I mean?

In an amazing article from the academic journal Psychological Science, researchers suggest that “giving time gives you time”. The authors found that spending time on others (instead of yourself) boosts how much time you think you have — in both the present and the future.

Many of us feel pressured by the modern world. We feel rushed, as if there’s never have enough time to do what we want. We feel a lack, a scarcity, of minutes and hours and days. To cope with this, we tend to turn inward. We watch TV. We play videogames. We get a massage. But studies show that “wasting time” like this truly is a waste. When we spend time on ourselves, we feel like the time is lost.

On the other hand, when we give our time to others — helping friends or volunteering in the community, for instance — we experience feelings of “time affluence”. Plus our time seems “fuller”. We feel better about ourselves and what we’ve done. And as a bonus:

“Giving time to others not only increases the giver’s sense of subjective time but can also increase the recipient’s objective amount of time, such that giving time contributes to the well-being of both the self and others.”

That, my friends, is abundance in action.

The bottom line? “When individuals feel time constrained, they should become more generous with their time — despite their inclination to be less so.”

The same idea applies to other areas of your life in which you experience feelings of lack. When I started giving away and selling my Stuff several years ago, for example, I came to realize just how much I had. Before, when I was constantly in acquisition mode, I felt like I had very little. I was wrong. I had mountains of things!

If you feel a lack of respect from others, give respect to others. If you feel a lack of compassion from others, be compassionate to others. If you feel like people don’t love you, love other people. If you feel broke, donate time and money to the poor. If you feel like you’ll never have enough wealth, systematically give away some of what you have.

In The Seven Habits of Highly Effective People, Stephen Covey writes:

The abundance mentality…is the paradigm that there is plenty out there and enough to spare for everybody. It results in sharing of prestige, of recognition, of profits, of decision making. It opens possibilities, options, alternatives, and creativity.

The abundance mindset comes from understanding there’s plenty in the world: plenty of money, plenty of love, plenty of time. There’s plenty for everyone — both for you and for others. There’s plenty now and there’ll be plenty tomorrow. Enjoy it!

A Real-Life Example of the Abundance Mindset
While we were wintering in Savannah two years ago, Kim hustled to get her dental hygiene license for the state of Georgia so that she could earn some money. She spent a couple of days driving across the city, dropping off résumés and speaking with doctors. Soon she started getting calls asking her to do fill-in work while other hygienists were sick or on vacation. She also got an offer for a long-term position at a big office in town.

Kim could have taken the long-term gig. In fact, she was tempted. “What if I can’t find any other positions?” she asked as we talked through her options. “This is a sure thing. Maybe I should take it in case nothing else comes along.”

After a few days of internal debate, Kim decided not to take the long-term offer. “I’m getting plenty of calls from other offices,” she reasoned. “I’ll bet I can stay busy just with the short-term stuff, and that’ll give me greater flexibility.”

Sure enough. Because she refused to make a fear-based decision, because she chose to believe she’d have more opportunity rather than less, she was able to pick and choose when and where she’d work. She had more offers than she had time. She constantly got new calls asking her to fill in.

When we returned to Portland, she used the same experience to find permanent dental hygiene positions. She cast her net wide, then waited for the offers to come. And they came. By exercising patience and an abundance mindset, she landed two gigs that she loves. (Plus, she still gets fill-in offers all of the time.)

The post Mastering the abundance mindset (and changing your money blueprint) appeared first on Get Rich Slowly.

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amijangos
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