We all have the opportunity to become successful one day. Getting there depends on several factors such as your persistence and dedication.
Another factor I never thought of until I saw an awesome video on Entrepreneur Mindset’s Facebook page. This factor has to deal with our very own mindset about spending. The theory is that each income class has different spending mindsets.
Honestly, my jaw dropped while the light bulb turned on in my head.
Instantly, I started looking into the mirror to see where I was with my mindset. This was a rude awaking but very welcoming. To be honest, this video also helped me write about the 8 personal finance moves I wish I knew before turning 30.
But I digress, today we will talk about where my mindset was and where it is going since watching this video.
First, let’s talk about the theory and the different spending mindsets. Hopefully, this will be a rude awaking for you as well to get you on the right track to financial success!
The thought behind this theory is that each income class in society looks at money differently. Each class spends their money on different items that will either give them short-term pleasure, cost them more money, or will make them more money (I wonder who that could be).
The intent of this article is to look at things from a 30,000-foot perspective. Yes, I do agree, this might be an over-generalization of everyone and all of the variables that come into play. But that is not the intent. We could write a whole book if we dug that deep into this subject. While reading this article, keep this in mind.
After reading this article, I want you to come out thinking about your own spending habits and taking a serious look in the mirror to how you can make those habits better.
Before we dive into the spending mindsets of each income class I want to clarify a couple terms.
- Assets: Something that pays you after you purchase it.
- Liabilities: Something that costs you money after the initial purchase.
Okay, now I think we ready to discuss the different income classes. Let’s take a look at each class to figure out what mindset you have.
The lower income class is defined as any family of four who makes less than $42,000 a year (Pew Research Group).
These people tend to spend money on frivolous stuff that really has no value. Typically this stuff is not needed and is bought for that short-term sense of satisfaction.
I used to be like this not long ago. I would convince myself that I had to buy stuff because it was a good deal. Between my wife trying to correct this thought process and me working on Wallet Squirrel, I have turned my mindset around to not buy any unnecessary stuff anymore.
So what is this unnecessary stuff? As I think about my previous purchases it would be the Xbox One or a new TV or an iPad that is never used.
One of the poorest people I know currently has this spending mindset. It is really interesting actually how his spending habits match the exact definition of the lower-income class. He spends any of his hard earned money on very unnecessary items that he has convinced himself that he needs. If the item is on sale at the local REI, he buys it.
The sad part is he wants to purchase a home one day but this continuous frivolous spending pushes him farther and farther away from that goal. Especially as home prices are just going higher and higher here in Denver.
According to the Pew Research Group, “Middle-income households – those with an income that is two-thirds to double the U.S. median household income – had incomes ranging from about $42,000 to $125,000 in 2014.” (Pew Research Group).
You can find out what income class you belong to by using Pew’s calculator. The middle class is the income class that my wife and I fall into. Let’s see if we spend like the middle-income class typically does.
The middle class is very similar to the lower class, just with bigger toys.
Typically the middle class appear to be rich but really are not. Since the middle class can spend more money, they can buy more fancy toys such as cars, boats, second homes, and so on. These items are known as liabilities or things that cost you more money after the initial purchase.
Since they have all of these toys they appear to be rich but really are not. This is because they are spending all of their extra money maintaining their liabilities.
Because of these more expensive toys, you might have more debt. I know I did with our car and that is why I started blogging with Andrew. To pay off more debt. Blogging helped me pay off our $7,000 car loan in three months! If you are interested in blogging, check out our article on how you can start a blog.
This leaves the upper-income class or anyone who makes more than $125,000 a year. (Pew Research Group).
I see a lot of gray area within the upper-income class and their spending habits. I know a lot of people that earn more than $125,000 a year and still have the spending habits of the middle-income class. These people from the upper-income class typically do not become richer because they are too busy propping up those liabilities.
For this article’s argument, we will look at the upper-income class that spends their money on assets. Remember, assets are purchases that will earn them more money rather than cost them money.
Looking at the ROI (Return on Investment) for each purchase, the rich will analyze whether they will make enough money for the purchase or not. These purchases are typically items that will move them forward financially such as stocks, rental properties, and advertisements.
Where are you now?
So where do my wife and I fit? I kind of see us within the middle-class spending mindset. We have two cars and an old house that needs a lot of updating.
Since we are not even close to being rich, I also see us as transitioning from a frivolous spending mindset to a very frugal mindset. We, mainly me as my wife was already there, really analyze the purchase before we make it.
This leads me to the last spending mindsets, being frugal. You can be within the lower or middle spending classes and not spend like they typically do. You do not spend your money at all and save it. I believe this is how you can naturally move from one income class to the next.
I have talked about similar thoughts before in my 9 Spending Habits That are Killing Your Budget article.
What income class’s spending mindset do you most relate too?
How to Change
When I started changing my mindset, the first thing I did was start using Mint to track our spending with an eagle eye. With an honest review of our spending my eyes were again opened so wide it was impossible not to change our spending mindset. If you are curious about Mint you can check out our Mint Review here.
The next steps after you really start analyzing your past spending habits, it is time to start analyzing each and every future purchase. Ask yourself the following questions.
- Do you really need it?
- Is it a liability or an asset?
- What is your ROI of the purchase? FYI, ROI does not always have to be a financial gain, it can be something like a health gain.
Now, it is your turn to go out an change your spending habits!
Andrew and I are always looking for new ways to earn more money so we can invest more or pay off our debt quickly. If you are too, I recommend checking out our Ways to Make Money page. Here we find and test out new ways to earn more money on the side.
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