Of course it would be a personal finance blogger who has a real life, philosophical discussion about the merits of different money mindsets. I was that person recently, having taken part in a conversation that went down the path of discussing the merits of a “scarcity” mindset versus an “abundance” mindset when it comes to money.
Yes, I know. I’m a money nerd.
How the Conversation Started
We were talking about how here in Chicago, there are a lot of younger people buying pricey condos and living it up not long after graduating from undergrad, or perhaps grad school. I was one of those people back in the day (post-grad school), at least to some extent. It was a great time, but I compare my finances to people I know who lived at home with parents for a number of years at the same age, and they were able to plow money into savings at a much greater rate.
Consequently, that money – which was then invested, presumably – has grown to the point where these people are in really good financial position. Compound interest worked its magic, and while they may have sacrificed a little bit in terms of lifestyle at that age, they’re reaping the benefits later in life.
I thought that the people spending and living it up are being a bit shortsighted and should have chosen to live conservatively and save for the proverbial rainy day. My friend though that doing that when really young is living scared, and that it’s better to have a positive “can-do” approach toward making money and having marketable skills.
So, my position was described by him as a “scarcity” mindset. In other words, a way of thinking about money that makes it seem like something that’s difficult to make. The criticism was that having such mindset causes people to not think expansively, and be scared with money.
The problem (according to the critic of this way of thinking) would then be that by being defensive, less risks would be taken in general. And risk-aversion could theoretically impact your willingness to aim high with goals, maybe not pursue new jobs, not actively network with others, and even be scared to invest intelligently. With investing, there is of course a risk/reward component to things, and every percentage point of rate of return can really matter over the long term.
My view, as I defended it, is that money is not necessarily easy to make. Things change in life, and people’s lives can take many twists and turns over the years. Life is not a linear, step-wise process with a guaranteed upward trajectory for everyone. Industries consolidate, jobs change, accidents and health issues can arise, divorce can happen, and any number of things could occur.
So, with my view, we should not take anything for granted when it comes to money. Hang on to it, because you’ll need it throughout your life for reasons you might not even be able to predict. You never know, so be careful.
Now, this doesn’t mean one should shy away from incorporating risk with investments. Obviously, historical stock returns are much better than keeping all cash! I’ve written quite a bit about stocks before. But when thinking about how we can build and keep wealth, while income generation is where it all starts, if we don’t save money and manage risks, we could be in trouble later.
With the 20-somethings I mentioned earlier, my recommendation would be to save as much as possible when younger. It’s not necessary to spend big time on a dream home or condo, drive a great car, or take exotic vacations all over the place. To the latter point, I do think experiences can matter a lot more than material things, so I’m not suggesting never traveling (I traveled a good deal). Rather, I just think it’s important to focus on saving as much as possible when young, rather that splurging. Have fun with whatever you have left over after meeting aggressive saving goals.
So, his viewpoint was more along the lines of living with confidence in yourself that you’ll always be able to succeed. In his view, by thinking positively, your actions will be positive and subsequently so will your results. Think like a winner with a never-lose mentality, and you’ll never lose. Rather, you’ll be able live a full, rich life without being held back by fears of not having enough money.
To this way of thinking, by being open and willing to live for your enjoyment in the moment, you’re not delaying gratification for some rainy day. Instead, you’re truly making the most of your time. And by doing so, you’ll be more likely to actively take risks in your life that will lead to a better outcome for yourself in terms of making money. Even if you might spend more to enjoy the moment, this mindset would also make its way to your investments, where you would be again willing to take risks that could yield big returns later.
In other words, this is something along the lines of “Life is short, so go big, or go home!”
For the same 20-somethings buying nice condos, cars, vacations, etc – this fits right into this way of thinking. Don’t limit your life, the thinking goes. Get what you want, and be confident in your ability to make it happen in the future as well.
Meet in the Middle?
Yeah, I think it’s probably good to strive for balance, as I think of it more. But ultimately, I’d rather do so while leaning toward the scarcity mindset. So while striving for more and of course living for today, we can plan for tomorrow and save for our future expected and unexpected needs.
So on a scale of 1 to 10, with 1 being the scarcity mindset and 10 the abundance mindset, I’d say I’m at about a 3.5.
My Questions for You
What do you think of these two mindsets?
Where would fall on the 1-10 scale of scarcity vs. abundance?