The biggest difference between people who stay broke and those who build lasting wealth isn’t talent, luck, or income - it’s financial intelligence. Let’s explore three money habits that quietly make people rich.
The first habit is self-tax for your future self. Most people pay for everything first and then count on transferring some of it to a savings or investment account at the end of the month. Set up an automatic transfer the day your paycheck arrives. Pay your future self first. This is an automatic tax we have to pay for our future selves. Only then do we need to allocate the remaining money to cover everything. Take your own example, but don't overdo it. Start small, so you don't overdo it, and only gradually increase the tax rate for yourself.
In 2002, Michael Carol experienced something incredible. At 19, while working on a garbage truck, he won £10 million in the lottery. That's an amount that can set you up for life and even provide for your children. So what did he do with the money? Instead of buying assets, he threw himself into buying liabilities. What exactly did the money go towards? A huge mansion that required a fortune to maintain, a fleet of luxury cars that he used to cruise the countryside, and, of course, lavish parties.
Just eight years after winning, Michael declared bankruptcy and lost his home. He ended up on benefits and later returned to manual labor for relatively low wages. He worked as a coal deliveryman and also as a garbage collector. History has come full circle. You see, everything Michael bought was a liability, requiring payments or depreciating. The mansion was eating up thousands of pounds every month in heating and taxes, and the new cars he bought were worth less and less each year. And that was his huge mistake. Michael's story demonstrates that a financially intelligent person must understand the difference between assets and liabilities. And this isn't about the accounting definition, but rather the definition proposed by Robert Kiyosaki in his book "Rich Dad, Poor Dad."
He writes that an asset is something that puts money in my pocket. A liability is something that takes money out of my pocket. I'm slightly expanding on this and looking at it as an asset as well: something that generates cash flow, such as interest or dividends, or that increases in value. Liabilities, on the other hand, are something that requires fees to maintain or depreciates in value. Financially intelligent people resist their temptations and first buy assets that earn them money and provide a sense of freedom. Only later, when they have secured their future, do they use their free funds to buy liabilities. Quite the opposite of Michael's.
Habit number two is understanding the mathematics of competence. The American Social Security Administration conducted a massive study of lifetime earnings. It showed that people with higher levels of education earned hundreds of thousands of dollars more than those with only a high school diploma. For those with a master's degree or higher, the difference was as much as $1.5 million over their lifetime. But it's not just about formal education. The truth is, in today's world, mere paperwork is becoming less and less important; skills that solve real-world problems are becoming increasingly important. These skills translate into high earnings, and yes, they can be mastered at university, but there's more to it than that. Let's look at the math. The inability to earn more is an invisible cost that few consider. If you earn $5,000/month but could earn $10,000, your lack of skills costs you $60,000 a year. That’s the hidden cost most people ignore. But if the person is able to invest time and money in improving their skills, it will likely be the best investment possible. You can learn for free, for example, from YouTube, or buy books, courses, training, access to communities, or mentoring.
Habit number three: a responsible approach to your future self. Hal Harfield, a psychologist at the University of California, used MRI scanners to measure how we think about ourselves in 10 years. He discovered something shocking. When subjects thought about themselves today, specific brain regions lit up. However, when they thought about themselves a decade from now, the brain activated the same areas used when thinking about complete strangers. This means that, for our brains, saving and investing is like giving money to a stranger. That's why delayed gratification is so difficult. From the brain's perspective, it looks like this: Why should I deny myself something now so that some future stranger will have a better life? Financially intelligent people, however, are able to build an emotional bridge to this stranger. They treat their future self as someone for whom they are responsible. This manifests itself in the form of delayed gratification.
What does this look like in practice? This could be, for example, not rewarding ourselves with an expensive car as soon as we save up for it, or working somewhere where we earn less but learn much faster, or investing money in stocks or bonds. Instead of viewing all these things as sacrifices, financially intelligent people see them as a gift to their future selves. Every time you resist an impulsive purchase, you literally pay yourself from the future. Every dollar we invest now buys us more security, freedom and opportunities in the future.
