We’re not wealthy but I’d say we’re getting more comfortable, financially. Comfortable is far from early retirement though, a goal we are striving for. I know a few folks who have achieved early retirement and financial freedom. I’ve noticed a few things over the years from these individuals when it comes to their financial habits. They certainly aren’t flashy with their money – at least those people I know. They have goals for sure. They are forward-thinking, about everything. Over the years I’ve watched, observed and learned from other people who are financially free. Here are some things they seem to do much better than me.
1. They manage debt effectively
Wealthy people either seem to leverage debt as a tool or simply avoid servicing debt altogether. By leveraging debt as a tool, they seem to fully understand their risks as they incur debt to build assets or generate cash flow from their investments. Real estate and secondary properties in particular come to mind. On the flipside many wealthy individuals I know got out of debt early and stayed out of debt. Their approach is to kill debt early and use income that would otherwise go towards servicing mortgage debt or consumer debt to buy assets for their investment portfolio instead. These are simple concepts to understand but rather difficult to execute upon over time.
2. They understand cash flow very well
The well-to-do individuals I know focus on cash flow, rather, they have a very good handle on it. They understand the income coming in and the expenses going out, almost to the dollar. They make good assumptions and they are realistic when it comes to their income expectations. They are able to forecast expenditures easily and with modest accuracy. Cash flow is top of mind for them.
3. They do their homework
The wealthy seem to do their due diligence, on everything. They can be meticulous. Sure, they might have experts and professionals they rely upon for some things but they also have a high-level of confidence in their ability to research, understand and make decisions about a host of issues or situations. They pay attention to details when many others disregard them or don’t see them.
4. They’re bullish and they continually improve
The wealthy seem to be optimistic about the future, they see challenges as opportunities and they do not dwell on the past or mistakes made. They are bullish about their chances and choices. They work hard and they have focus. They have goals, they know what they are striving for and they know what they want. The financially free and successful strive to understand financial matters so they can improve.
The wealthy people I’ve met certainly have a motivating mindset for me. I’ve worked on the items above in recent years and I think the progress is starting to show; changing the way I think, act and behave about money matters. I’m hopeful what I’ve learned from others can be tailored to help our financial plan and the good things that might come from it.
What traits do the wealthy have – what do they do better than you?
I was puzzled at first when you said wealthy people focus on cash flow. I often say that people who handle money poorly focus too much on cash flow. You seem to mean that wealthy people know what cash is coming in and going out. I agree. What I mean is that people who handle money poorly often focus only on cash flow and ignore debt. They worry about car payments and mortgage payments while ignoring their total debt and how long they will have to make these payments. It’s amazing how we can both say sensible things using the phrase “cash flow” but mean totally different things.
Everything has a context, there is no one singular definition for everything…
I think wealthy people are far ahead of me in that they absolutely know what cash is coming in and going out. People who handle money poorly, generally, have no idea about this and thus might spiral easily into more debt. I wish to avoid debt traps as much as possible, currently digging out Michael!
For me I believe the wealthy are better risk-takers than I am. I believe that you have to put yourself out there and especially when it comes to investing and just see where it takes you. I’m always the guy who says … but What if? Maybe one day that will change.
I tend to be too conservative as well Mr. CBB.
I’m counting on the managing debt thing to help propel me towards wealth. I have devoted a lot of time to studying how much in monthly payments I can afford to service, and devote even more time to effective uses for that debt. I know that I can pay the interest and some principal with a very small percentage of my income and if I had no income dividends could make the payments. In the meantime I am able to own far more equities than I could without the debt.
I think understanding your capacity for debt, leveraged or not, is huge Tyler. The wealthy seem to be able to do this much better than I can. I’ll be happier with no mortgage debt in another 5-7 years. That’s the plan.
Good question Lloyd.
I’ve never heard of a credit card with a weekly billing cycle.
We enjoyed our money and bought things we wanted, often more than needed, but never let easy credit take control. Always worked to repay loans quickly. As everyone mentioned, debt management is a must, even if you don’t manage to save money early. That gives you the chance to save a lot later to make up for your lost opportunity, but at least having to say you enjoyed life or at least didn’t go without.
The other point I feel is important is sharing. My wife was involved in the decisions and choices we made and kept track of the finances. Later we started recording and tracking our expenses and she kept the books. Knowing what you spend and where the money goes makes one aware of what it will take to live without work income.
“Knowing what you spend and where the money goes makes one aware of what it will take to live without work income.” – we need to be more diligent at that but we’ve gotten much better over the years.
I know I’ll feel better about things once our debt is gone. In some respects though, it is also forcing us to save with debt “so cheap” now, paying down debt is good but so is getting more money working for us (i.e., more stocks and ETFs to DRIP more units every month; new purchases; etc.)
Why do you pay it off weekly Steve?
I retired early and I would agree with staying out of debt. We use our Capital One credit card for almost every purchase because we get 2% cash back. But I pay it off weekly. Yep, weekly, every Friday!
The other points were right on the mark as well.
Great stuff Steve. This seems to be a common theme amongst early retirees – they have little to no debt early on (i.e., they retired their mortgage in their 30s or 40s).
That very encouraging for me as I feel my recent decisions make me better in many point you mentioned! 😉
We’ll keep it up and make it!
Well, that’s good for your confidence then Mike 🙂
Thanks for reading and sharing.
Great summary Mark. I enjoyed reading it and concur 100%. You’re obviously learning the lessons well.
Plenty of wealthy people also operate a business (and leverage that to create income and potentially build an asset that has value), and they are overall good decision makers.
Thanks Deane. I’m trying to learn my lessons, otherwise, I’m doomed to repeat them. Self-made businessmen (and women) are impressive, they have lots of creative energy, innovation, drive, self-improvement and conviction in their decisions. I hope to grow those traits more over time.
First off, “financially free” does not necessarily equal wealthy. I don’t know a lot of wealthy people but the people that are financially free all seem to keep simplicity in mind. I try to keep complexity to a minimum so that I don’t need to be particularly smart. When I try to get fancy I fall on my face.
“When I try to get fancy I fall on my face.” – Just tweeted that Lloyd. Good one.
True, wealthy does not equate to financial freedom automatically but in the broader context, I do consider them wealthy, i.e., it suggests they have an ample amount of something, monetary or time 🙂 Simplicity is critical and I’m working on that in my life, in many areas. I recall da Vinci’s quote: “Simplicity is the ultimate sophistication”.