A Paycheck Mentality

I can’t speak for other countries but Americans and their paycheck mentality is an interesting subject. Americans seem to believe the more money they earn the richer they become. This mentality is hammered into most Americans from birth. Every parent wants their kids to become doctors or lawyers so they will earn a large paycheck. Never do people stop to think that it is not how much you earn but what you do with it that counts.

It’s truly amazing how Americans associate wealth, material things, and income. People see a new car and instantly think that person has money. We judge the economic success of our friends, relatives and colleagues by their salaries and what they ‘own’. Never do we stop to think that the person driving that old beat up sedan is wealthy. Indeed, income and wealth are very different and distinct economic measures.

Income is how much money you earn. This is the indicator that most Americans live by on a day to day basis. It is the paycheck mentality. When people talk about money they instantly seem to gravitate towards how much someone earns. Unfortunately these individuals will never truly become wealthy. They completely ignore what really counts: how much money you keep.

The measure of true wealth is your net worth and not you’re earned income. Net worth is the combination of all your assets minus the sum of your debts. As an individual saves and invests their net worth will grow at an ever increasing pace due to the effects of compound interest. Eventually the income an investor generates from his or her net worth will overtake their earned income. This is the true definition of wealth.

Before an individual even contemplates investing they need to break away from a paycheck mentality. If you can not purchase an object with cash you simply can not afford it. Every time you take out a loan for some material object you are directly inhibiting your investment returns.

The takeaway of this article is simple: Get away from a paycheck mentality. Just because you can afford the monthly payments for some object does not mean you truly can afford it. Even before you contemplate investing you need to pay off credit cards and high-interest debt. To do otherwise will forever doom you to creating wealth for other individuals.