4 July 2007 5 Comments Print This Post  Email This Post

When it comes down to it, I see two basic mentalities that people have when it comes to spending and allocating money. There are people with the consumer’s mentality who try to look rich and there are those with the investor’s mentality who are truly wealthy. In the long run, a person with the investor’s mentality, even if they make the same annual income as someone with a consumer’s mentality, will have much more money than the latter. This is because consumers blow their money on overpriced products and outrageous luxuries. Investors however, buy necessary products at great prices and invest the rest. The invested difference grows more and more every year. That is why the consumer will come up short even if he or she makes as much money salary-wise as the investor. I mentioned in the Money Socket Fundamentals of wealth building that saving and investing money is much more important than just making it.

Let’s go through some of the major purchases we make or will make in our lives and see how someone with a consumer’s mentality and someone with an investor’s mentality would think and act.

General Shopping

Consumer’s mentality: A consumer loves to shop for the sake of shopping. He or she will often go to the mall to shop just to look cool or act rich. A consumer will buy expensive items because they think that the most expensive products are the best. A consumer will buy the latest gadget, even if they have to pay above the normal retail price on ebay. They are actually proud to buy the most expensive stuff and they get a kick out of paying for the items at the register because they can show off their ability to buy to the cashier. They are proud to put the purchase on their platinum credit card by the way. A consumer buys stuff in an effort to make themselves and others like them more.

Investor mentality: An investor will hardly ever shop at a full retail location, they usually buy online or at a discount outlet. Even then, an investor will look for items on sale. Investors don’t care about brands, and even if they do happen to like high end brands, they will never pay full retail for those brands. Investors buy products based on return on investment and value. Investors will not spend $100 on a special cool looking t-shirt that Brad Pitt was seen wearing when that investor can buy a comparable shirt for $15. Investors will buy the latest gadget at retail price, only to sell it on ebay for above retail prices to someone with the consumer’s mentality. Investors buy products to make themselves feel good, however the reason for them feeling good is the knowledge that he or she got a great deal.

Buying a Car

Consumer’s Mentality: A person with the consumer’s mentality wants more car than he or she can afford. A consumer will buy an expensive or cool looking car so he or she can show it off. Consumers will buy cars on credit and make monthly payments, so that way they can buy a higher priced car than they could without financing. A consumer wants a brand new car, simply because it is brand new and it is the latest. A consumer likes to walk into a dealership and act like a movie star. A consumer will buy the car without negotiating much so the salesman thinks that he or she is rich. A consumer will buy high priced accessories for the car and maintain the car at the dealership because they think that paying more for the same service makes the car run better.

Investor’s Mentality: An investor buys a car they can afford. An investor finds the nicest car at the absolute lowest price. Investors buy used cars because they know that the new cars lose half of their value after the first four years. Investors buy four-plus year old cars to get that 50% discount, which is the 50% that the previous buyer/consumer lost. To read more about car buying, feel free to my article on used car purchasing here. Investors negotiate the heck out of the price and comes up with a number that is fair to the dealer and themselves. Investors then search for the lowest price running costs for the car including maintenance, gas, and repairs.

Buying a House

Consumer’s Mentality: A consumer buys a house as a luxury. Consumers buy more house than they need, they just want a big house because thats what rich people have. Consumers buy the nicest staged and remodeled homes at high prices so that they can have the nicest house among their friends and neighbors. This way they can brag about how much they paid for the house and the cool stuff they have in it. Consumers fall in love with the house, then they make high priced offers to make sure they get that house. Consumers don’t care about the price of the house, they care about being about to make the monthly payment.

Investor’s Mentality: An investor buys a house out of necessity and sense. An investor looks at the pros (tax write-offs, equity buildup, potential appreciation) and cons (opportunity cost, interest rates). Investors buy houses in need of some fixing up because they know they have a chance to buy the house under market value, then add remodel the home to their liking. Investors fall in love with the deal, not the house. Investors will buy their home under market and brag about that instead of bragging about how much they paid. Investors buy below market and sell above market to consumers.

The differences between the investor’s mentality and the consumer’s mentality are their actions and reasoning like those I mentioned. Consumers spend on price and investors spend on value. Because investors can save much more money than consumers, they can ultimately invest more money, which is the most important factor in wealth building fundamentals.

Joe and Bob 

Heres an example. Lets say Joe and Bob are buddies who grew up together and they make the same amount of money every year. Joe has an investor’s spending mentality is able to save an average of $2000 a month more than the Bob, who has consumer’s mentality. This takes into account all expenses including housing and cars. At the end of every year Joe would have $24,000 more than the Bob, which he can invest. If Joe the investor puts $24,000 each year into an investment that yields 10% a year, over 30 years he would have $361,886.85 more than the Bob. If the amount saved was just slightly higher, at $2500 a month, the Joe would have $452,358.56 more than the Bob after 30 years.

Over the long run, in this example I used 30 years, the Joe is much wealthier than the Bob. However, during those 30 years, the Bob looked rich. He and his wife had the biggest, nicest house among their friends, the latest and most expensive car every few years, Italian designer clothes and the coolest gadgets. But after 30 years, Joe, who is truly wealthy, can do as he pleases and spend money on whatever he feels like. Bob, on the other hand, will realize that the income to support all of his extravagances will be gone once he is too old to work. He then starts to wonder how he will ever be able to retire and he’s wondering why Joe, who never looked rich, is doing so well.