A while back I was having a discussion with a colleague about the mindset of a particular person and I commented that they were essentially a “poor person with money.” In the context it made sense (they grew up poor, but had subsequently done very well), but I realized that locution would seem odd to many people. It has to do with the psychology of money and I thought it would be a good topic for this month’s newsletter. There are exceptions of course, to the generalizations I make below, but I think they are at least somewhat apt, though anecdotal.
I’m going to use the more emotional terms “rich” and “poor” rather than the more neutral “wealthy” and “non-wealthy” to describe subjective psychological states. For example, Mike Todd (an American theater and film producer) back in 1953 said:
I’ve never been poor, only broke. Being poor is a frame of mind. Being broke is a temporary situation.
Rich people (particularly several generations down the line) typically have an abundance mindset. Money is just there and will always be there and certainly isn’t something to be anxious about. They usually exhibit equanimity about their finances.
Poor people (again particularly over several generations) are just the opposite and typically have a scarcity mindset. Money usually isn’t there and might not be in the future and absolutely is something to be anxious about. They usually exhibit worry about their finances.
For the objective state of whether someone has adequate resources to support their lifestyles I will use the more colorful terms (a la Mike Todd) “broke” and “loaded.”
So we have four possible combinations of folks:
- Loaded rich people
- Broke poor people
- Broke rich people
- Loaded poor people
The first two in the list are the expected cases, but the last two – where the mindset doesn’t match the resources – are more interesting.
Broke rich people are usually the heirs of the wealth creators who either alone or in concert with previous generations have squandered the family fortune. With their abundance mindset they don’t recognize (or are in denial about) the precarious state of their finances and adjust far too late to what used to be called “straightened finances.” As Hemingway is often said to have observed, they go broke slowly then all at once. (The actual quote from The Sun Also Rises, 1926, is “How did you go bankrupt? Two ways. Gradually, then suddenly.”)
Loaded poor people are usually first generation wealthy and they worry a great deal about becoming poor again. This frequently causes them to be poor investors as they either avoid risk (and the returns that come with it) or to flee risk at exactly the wrong times. In other words, they invest too conservatively (e.g. exclusively bank CDs) or invest appropriately but sell at inopportune times (e.g. in late 2008).
We can learn from both groups:
- The equanimity of rich people is good for investing, but bad for spending.
- The worry of poor people is good for spending, but bad for investing.
Over time you will be more financially successful if, like poor people, you watch your spending but, like rich people, don’t worry much about your short-term investment performance.