Wealthy Mindset Series #2
"Your income will be the average of the five people you spend the most time with.” – Jim Rohn
1. The importance of who you hang around with.
If you hang around people who struggle to earn a living, it is likely your income will be similar. If you hang around people who earn hundreds of thousands of dollars per year, it is also likely your income will be similar. And it STARTS with who you hang around with, and not the other way around.
Here is another quote I often use: "Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars."- Warren Buffet
I did not want to hang around jerks, and many years ago I realized that if I wanted to create wealth I needed to hang around people who earned far more than me and who had a net worth far larger than mine. Guess what? How they think and their attitudes rubbed off on me. I saw opportunities where before I saw blocks. I looked at how to effectively grow my business, how to create large dollar contracts and more. Who you hang around with is one of the keys that opens the door to more wealth.
2. Money terms like interest versus earnings and the cost of money.
There are so many terms the wealthy use when they talk about money, and the first thing to understand is that the wealthy do not think it is rude to talk about money. They will not hesitate to talk about the cost per square foot to build a new house, or the best interest rates on savings, or the appreciation they earned from a stock, or how their broker might have found an Initial Public Offering (IPO) for them. Another point is that if you do not have an understanding of money terms, you cannot participate in the conversation. Here are just a very few things you should understand:
- Interest is what a borrower pays a lender for the use of money. If you deposit money in a bank, you are the lender and the bank is the borrower. In this environment the bank will pay you about 1% to borrow money from you. (This is a typical savings account.) If you borrow money from the bank, they are the lender and may charge you 6-10% interest. The difference between the 1% they pay on savings and the 6% they charge on a loan is called the “spread,” and this is how they make a profit.
- The cost of money refers to borrowing money to invest, whether in other stocks, a business, real estate or whatever. The point is that more money should be earned than the amount of interest you pay. This is the cost of money, also called the cost of funds. If you borrow money at 4% and you're able to invest it, or loan it out at 10%, then you're the one earning the spread, and your cost of funds is 4%. You do not have to put money in the bank to earn interest. This is available through peer-to-peer lending, trust deeds, tax liens and other financial instruments like bonds.
- The term “earnings” is often confused with interest by people who do not know money terms. If you own a stock, or a mutual fund, it may pay a dividend and grow in value over time. If you receive a 1% dividend and it grows in value by 8% over a one year period, the total earnings would be 9%. This is not interest, but total earnings. 1% is income and 8% is appreciation. If you see that a mutual fund or stock returned 22% over a one year period that could all be appreciation, with no income and has nothing to do with interest.
There are so many more financial terms, I could write a whole booklet: Compound interest versus simple interest, debt coverage ratio, capitalization rates, amortization, depreciation, present versus future value, discounting, puts, calls, margin accounts, on and on.
In the next article in the series we will cover how the wealthy use questions instead of making statements when they hear familiar information.
To your prosperity,