Making Financial Changes

This is the second in a three-part series of in-depth articles on how to achieve Financial Freedom. It will help you prepare to make the changes necessary to become Financially Free. The first article showed how to take on the optimal mindset for liberating yourself, financially, while the third article will help you to step into action naturally and successfully.

There is a classic story about Alexander the Great. It turns out he encountered a yogi on the day he came to the Indus river, following his conquest of Persia and the Middle East.

The yogi was meditating when Alexander walked up to him and asked, “what are you doing?”

“Contemplating nothingness,” said the Yogi. “What are you doing?”

“Conquering the world!” replied Alexander.

Then they both laughed (presumably at each other). But why?

Coming from the Greek philosophical tradition, Alexander believed we only have one life to live. Coming from the Vedic tradition, the yogi believed we are reborn many times. To Alexander, conquering the world before his life came to an end was the best way he could spend his limited time alive. To the yogi, stilling the inner fluctuations of his mind was the best way to reach nirvana.

Each had a mindset that shaped his goals and guided his actions, illustrating the power mindsets have over the choices people make in life. When it comes to finances, your Money Mindset determines the strategies, goals, and choices you make. In the last article (this is the second in a 3-part series), 9 Money Mindsets were explained. Each one has a different interpretation of what it means to be Financially Free, and one of them meets more of the definitions of freedom than any other: the Investor’s Mindset.

There is a definite advantage to being aware of your personal definition of Financial Freedom, and how it compares to others. Often, people have different definitions in different circumstances. This can be advantageous when you want to meet with the approval of your friends and family, but is often detrimental when you want to implement and maintain a long-term strategy. Plus, different Money Mindsets have different notions of the long-term and what makes a good strategy.

Financial Success Requires Preparation.

Financial Freedom is rarely (if ever) achieved overnight. Before one begins moving towards it, it helps to identify the effects of one’s Money Mindsets in different situations. There is an old saying in the business world; “your income is the average of the six people closest to you.” This is because social situations typically determine the Money Mindsets you hold, unless you consciously choose to hold one in particular. This is true for everyone from Wall Street executives who manage trillions of dollars to bums who beg for change. Your Money Mindset determines what you do when it comes to money.

No matter who you are, Financial Freedom is the product of a consistent and productive Money Mindset. However, changing it may distance you from some of your friends and family while moving you closer to new people and social settings. Along the way, you will most likely win some false friends and some true enemies in spite of being honest and fair in your dealings. Without a wise and consistent approach, Financial Freedom is next to impossible. Nonetheless, financial success is a worthy objective because it means you will have more freedom to make life more enjoyable, to do more good in the world, and to leave behind something positive when you go.

Focus on the liberating nature of Financial Freedom.

The journey to Financial Freedom starts with raising your awareness regarding your own thoughts about money. Part of this awareness includes seeing how different Money Mindsets produce different outcomes in your life and the lives of people close to you. While an Emotional Spender is likely to throw great parties and then have trouble paying the rent, an Employee is likely to be able to plan for upcoming expenses and then retire poor. While a Business Owner is likely to work harder than Employees for several years and then be able to take almost unlimited time off, an Independently Self-Employed person is likely to have more time and money than Employees but keep working well past retirement age. The point is, what one person finds liberating may seem like a high price to pay to someone else. It pays to be aware of what your Money Mindset is getting you into.

Once you become aware of the various Money Mindsets, it becomes a lot easier to pick the one that will serve you best in the long run. In an immediate sense, you may only be able to see how your current (or past) Money Mindset got you into the situation you are in at the moment. But what if you had made different decisions and taken different steps leading up to this moment in time? Which Money Mindset would have benefited you the most? Which one would benefit you the most in the long run? Who do you know has that particular Money Mindset?

Oftentimes looking at the past, present, and future like this helps a person to realize missed choices and alternatives. By examining things from a different Money Mindset, one can see possibilities that seemed hidden but were there all along. One is able to see where one made mistakes, who is actually supportive of one’s financial success, and different ways to act in the future. This is important because typically, there are people whose influence made a big difference to one’s decisions in the past. As one moves forward in time, one is far better off discussing finances with people who have Money Mindsets that result in real Financial Freedom than with people who are struggling.

You will find that you become more liberated, both socially and financially, when you choose to discuss financial matters with people you select carefully based on their Money Mindsets. But sometimes people have huge internal barriers to doing this, often because they fear losing friends or having differences with relatives. The key is to let yourself experience the forces of social liberation positively, rather than becoming bogged down trying to hold onto impoverishing relationships and ways of thinking. Financially unsuccessful people often mistake supportive suggestions and constructive criticisms about their Money Mindsets for coercive acts. Yet while it is natural to defend one’s boundaries, it is foolish not to try looking at things differently when one needs a change.

Attaining Financial Freedom is fundamentally liberating. The nature of this liberation is definitely pro-social, not just because the exchange of money is a social activity – there are always at least two people involved in any transaction – but because it often changes people’s situations (or lives) for the better. It feels great to be in a position where you can engage in the exchange of goods or services freely, knowing that money is just part of the transaction. In the final analysis, the difference you are making in the lives of everyone involved is what matters.

Leverage the Power of your Emotions.

Consider for a moment that every financial decision is made at some point in time. When we make decisions, how we look at time is very important. Many people are present-oriented, and so they are heavily influenced by the people and things in their environment when they make their decisions. Some people are past-oriented, and how they recall the past strongly influences their decisions. Finally, some people are future-oriented, and their goals and objectives (or their fears and pessimisms) help mould their decisions. Your time-orientation has an enormous impact on your level of Financial Freedom because it determines what is relevant to you when you make a decision.

Every financial decision you make is shaped by the intersection of your time-orientation with your Money Mindset. Your time-orientation determines the relative importance of the information available, while your Money Mindset determines the value you place on it. If Sally is a present-oriented Emotional Spender, she will tend to spend money gratuitously on goods and services (or gifts) she thinks might help to satisfy her emotional needs. If Harry is a future-oriented Employee, he will tend to be a very loyal worker who pays his bills on time and buys into the company pension plan. Of course, from time to time we all act out of character. Nobody is 100% in any intersection all the time for this reason. And as it turns out, there are three time-orientations that are characteristic of people who enjoy greater financial success in life than the others. They tend to enjoy better health and more fulfilling relationships as well!

It would be nice to say we all make decisions rationally (classical economics assumes this to be the case), but there is a strong body of evidence that shows people are not really all that rational in their financial decisions at all. This may seem obvious, but many people do not recognize how their own irrational behaviour affects them. For example, a past-oriented person who has negative feelings about money will tend to make decisions that push money away. If she has a Hoarder’s mindset, she will tend to store money where it cannot affect her daily life and then refuse to let it grow beyond a certain amount. Another example could be a future-oriented person who can see opportunities to create streams of income. If he has a Business Owner’s mindset, he will go about setting up a business system specifically for generating cash flow from that opportunity. The decisions they make are not necessarily rational, but their time-orientations and Money Mindsets affect them emotionally when they make decisions.

Research has shown that people who are successful financially, socially, and in terms of self-actualization, all have a similar pattern of time-orientations. In a nutshell, these are people who enjoy recalling positive memories and experiences almost to the exclusion of negative ones; choose that which offers a moderate level of pleasure in any given moment; and have interesting or exciting plans for the future. The ones with the highest levels of financial success have the Investor’s Money Mindset, and are followed (from greatest to least) by Business-Owners; Team-Oriented Self-Employed; Independently Self-Employed; Employees; Emotional Spenders, Avoiders, and Hoarders; and finally the Money Monks.

If you want to know how to leverage the power of your emotions to benefit you financially, try this simple thought experiment: Imagine formulating a plan to make some money grow, with a future time-orientation. What would the plan include if it was written by someone with an Employee’s mindset? What would it include if it was written by someone with a Business-Owner’s mindset? What if both plans were rewritten with a past time-orientation? It’s easy to see that very different decisions would be made – because Financial Freedom means different things to different mindsets, and the ability to see the possibility of achieving it depends on time-orientation.

As you imagined each plan, you considered how the Money Mindset and the time-orientation shaped the decisions that went into making it. Whereas the Employee’s plan included getting a job, the Business Owner’s plan included starting or growing a business. Whereas the past-oriented plan placed greater emphasis on things that worked previously, the future-oriented plan placed greater emphasis on what might work in upcoming circumstances. As a bi-product, the amount of money considered in each case also changed.

By applying the three time-orientations of successful people you condition yourself to be emotionally stimulated in ways that help you to succeed. All that remains is to adopt, consistently, the Money Mindset that will deliver the greatest amount of Financial Freedom in the long run. Of course, it helps a lot if you avoid “dream-stompers” and socialize with people who use these time-orientations in conjunction with the Money Mindset that will benefit you the most.

Get to Know Yourself Better, Financially.

By now you’ve probably noticed that if you want to achieve Financial Freedom, certain principles need to be applied consistently. It is more than an introspective process because none of the evidence for success – assets, net worth, cash flow, etc. – is found in the body. Problems crop up most when you are either inconsistent, or choose dysfunctional combinations of time-orientations and Money Mindsets. It can be frustrating because it may mean reconsidering your social life or training yourself to look at life differently. But when you find out what to do, it can also leave you feeling, thinking, and believing that life can be substantially better.

By answering the following four questions, you can evaluate which Money Mindset would be the most financially beneficial and meaningful to you, given your desire to improve your current situation. Compare the 9 Money Mindsets:

1. How much value do you perceive in getting the benefits of each one?
2. If you were to adopt one consistently, how strong are your expectations of being able to achieve its definition of Financial Freedom?
3. How long will it take to satisfy you that a new Money Mindset is actually paying off enough to be worthwhile?
4. And finally, how sensitive are you to acting from a different mindset?

Your answers to these questions will change as you gain greater competence with money, as you get older, and with the amount of urgency you feel around changing your life circumstances. By answering them consciously, you are able to observe your progress and see how the pros and cons you perceive in the different Money Mindsets change over time.

Asking these questions as part of your financial decision-making process also leverages your ability to think before you act. Over time, almost every habit you have can become so unconscious that you don’t even know you’re doing it. This is especially true when it comes to the Intersections between time-orientations and Money Mindsets. Often, people set themselves up to take action using one Intersection and when the time comes to do what it takes to achieve their objectives, they switch to a different Intersection and things fall apart. By asking these questions, you can prevent your habitual Intersections from interfering while you choose the Intersections that are most appropriate given your new financial goals and objectives. Changing mindsets can be a bit frightening when you are really stuck in your ways, yet highly liberating when it turns out to make your life better.

Asking these questions also helps you to create and maintain a self-image that includes being Financially Free. Consider that if you never imagined yourself having Financial Freedom, you could only create it by accident. On the other hand, if you picture it as part of who you are (or will be), it will help you adopt the Money Mindset and necessary time-orientations to make it so. Your subconscious mind will automatically go to work reconciling any differences between your current situation and what you imagine it should be. You will be able to consider more solutions, and different sorts of options will become apparent to you. The difference will show up first when it comes to the decisions and opinions you hold about money. Later, it will show up in the form of a change in your level of Financial Freedom.

In school, a mistake is something that costs you on a test. It is like an expense. Outside of school, a mistake can be made into an asset – but only if you learn from it. It pays not to repeat poor financial decisions, and the good ones bring you closer to Financial Freedom. Before one finally makes the changes one envisions for one’s financial life, one consciously or unconsciously creates a weighted list of pros and cons about making the change. By examining how it will affect yourself and others, and the reactions that everyone (including you) may have to it, you can bring about changes in your own perspective. Once you see money differently, it feels natural to make different financial decisions. And if you want to learn from your mistakes, you need to give yourself the freedom to experiment with making decisions so you sense where they may lead.

Commit to making and sticking to a well thought-out Plan.

If you’ve read this far, odds are that you are already committed to making a lasting change to your financial situation. You most likely sense the social liberation that is possible, experience emotions that motivate you to go further than just talk about it, and you are willing to re-evaluate yourself in the light of new information and options. This will take you right up to the point of acting on your intentions, and may even nudge you into taking some small and constructive steps. All of this bodes well because changing your financial picture requires commitment.

Often, people get to the point where they are ready (psychologically) to act but get stopped in their tracks because of some internal or external pressure. Most often, this pressure feels confusing and stalls the momentum a person has built up. But there is another way: the key is to realize that what you commit to determines what holds you back, as well as what moves you forward.

Making difficult decisions can test how deeply you are committed to your financial goals. Choices between short- and long-term goals, such as spending to maintain your lifestyle now or investing to have a better lifestyle in the future, are where this test occurs. In a world of instant gratification, this can be especially hard for younger people. Only once you no longer feel ambivalent about making long-term life plans will it feel natural for you to make a financial plan and stick to it.

How much information do you have? Is the information you have pertinent? Here is a collection of items you will want to gather. Keep in mind that most people feel anxiety to one degree or another when they look into these. Often, their commitment is challenged because they expect too much of themselves. The art of gathering this information is to focus on serenity during the process, and to expect incremental changes to be the norm:

1. Your current financial and personal status.

For a lot of people, this is usually the one that causes the most anxiety. It helps to keep in mind the reason you are gathering this information is so that you can make your life better. A very small amount of courage – just enough to help you get a clear picture of your actual situation – can have long-lasting benefits for your overall financial self-esteem. The trick is to look for ways to turn your financial mistakes into lessons, while focusing on the little things at first.

2. Your financial goals

The fact that goals are in the future is often a source of discomfort for people. While it is important to be moderately optimistic that you can achieve your goals, it is also important to be somewhat realistic. Goals that are exceeded tend to build confidence. People who have a poor track record of setting and achieving goals often prefer not to gather this information because they don’t believe in their own abilities. (If this happens to be you, refer to the previous item.) The key is to use small, manageable goals at first to build up your confidence and give you the experience that you need to set and attain larger goals.

3. Your tolerance for risk.

There is a balancing point between sleeping well at night and benefiting from financial decisions. How you handle risk has a direct bearing on what you are willing to do to reach your financial goals and have the lifestyle you desire. This is closely related to your ability to delay gratification, since a carefully made plan will likely have long-term rewards that take self-discipline to obtain. The key is to maintain the balance.

4. How you normally make important decisions.

Earlier in this article, there was a model of four questions that can help you to make important financial decisions. Other decision-making models exist, and most people already have a way they prefer. The key is to look at the results your decision-making process generates. If you are not doing very well financially, you probably need to re-examine yours. It always pays off to find a way it can be improved. In the long-run, how you make financial decisions is more important than financial mistakes you make in the short-run.

5. Who you communicate with about money, and why you’ve chosen them.

This one can really bring up some tough decisions for people. You may find that you’ve been choosing to listen to people who have absolutely no idea what they’re talking about. You may find that you’ve chosen advisors for reasons that are totally unrelated to their financial acumen. The bottom line is you need to decide who you talk with about money based on how qualified they are to speak about it. The only people who are truly qualified have been in a situation similar to your own, and have taken steps that have created a significantly better situation in real life. Everyone has opinions about what to do when it comes to money, but the only ones worth listening to have made decisions that caused their money to grow. The key is to spend time with people who have Financial Freedom, or are working towards attaining it with an open mind and a desire for evidence.

6. What your own psychological needs are in relation to money.

Did you know that not investing or investing too conservatively can be more risky than investing aggressively? Many people constrain their money from growing (like the past-negative Hoarder) or limit their financial opportunities out of a need for security. Others take foolish risks out of their need for freedom and self-sufficiency. Before you begin trying to make your money grow, it’s very worthwhile to reflect on why you need money and what you really want to do with it. The list may surprise you. The odds are your psychological needs around money also show up in your relationships because money is very often used to facilitate satisfying love-needs.

7. The risk of not diversifying.

One of the risks inherent in the Employee and Independently Self-Employed Money Mindsets is the tendency to put all of one’s eggs in a single basket. The Employee can get in serious trouble if he/she loses a job, and they both can get taken out of the game at any time if they lose their health. A Business Owner diversifies his/her product line in order to reduce the risk of losing a stream of income and sets up systems to run without him there. The Investor builds a diversified portfolio for the same reason. In the long run, it is important to concentrate your efforts but foolish to rely on a single stream of income to pay your bills. Once again, the key is balance.

8. The risks involved with changing your purchasing power, losing your money, and using money internationally.

It’s important to know the lay of the land when it comes to investing. If you pay off a debt, it may free up money to use for other things. If you lose everything in a bad investment, it may make you eligible for tax breaks. Foreign currency is useful while travelling but mostly useless at home. The financial decisions you make need to take into consideration how they may affect your overall lifestyle.

9. Your net worth.

Net worth is the measure of the total value of all your money and possessions less all your debts. It is like your score in the money game. However, there is a large subjective component to it that involves estimating things according to market value. eBay can be amazingly handy for calculating the value of such items because you can see how much you can expect them to fetch, and it can be a rather disappointing reality check for people when they find out a beloved family heirloom is worth basically nothing. (Sadly, this is much more common than finding a rare gem worth millions.) Net worth can never be more than a vigorously-calculated estimate but it does give you a pretty good idea of how well you’re actually doing, and how easily you can cover the bills if you get into trouble. The key is to keep informed on how big a financial hit you can take.

10. How to keep and organize your financial records.

Organized people are usually more financially successful than people who keep their records in a hodgepodge. But even well-organized people can experience confusion and frustration when it comes to sorting out their financial information. The key is to model the tools used by financially successful people. See the bibliographies from this and the previous article for books, videos, and audio programs that contain salient advice in this regard. The key is to progressively increase your level of financial literacy on an ongoing basis.

11. The financial problems and constraints you currently face or may face in the future.

Children create the need to save for their education, aging produces the need to save for old age, and social commitments can interfere with maintaining multiple streams of income. Knowing what holds you back from achieving Financial Freedom can serve to focus your efforts and help you to make the difficult decisions discussed earlier. The key is to be honest with yourself about how much freedom you have to act, given your situation, without getting bogged down in cycles of blame, denial, or delusion. “To thine own self, be true.”

12. Where you are in the life cycle.

People under 35 are generally able to tolerate more risk and willing to take more chances. People under 55 are often focused on reducing expenses and increasing savings. And people in their peak earning years will often be focused on saving for retirement. Although these stages are not distinct, considering what you want your financial situation to be like at different points in the life cycle can be an excellent starting point for making a plan you can stick to.

This list is not the whole picture. Examining each item can help you discover a large number of small steps that you can make. Done in bite-sized pieces, the incremental benefits of taking small steps can build momentum and help you set realistic and increasing financial goals that you actually accomplish. The point is that the small steps are essential, and need to be taken in order to reach the point where you are ready to make take the really big steps. There is an old saying; “Pennies become dimes, and dimes become dollars.” Little financial steps can add up to big financial accomplishments.

Make Promises and Use Deadlines to Move Yourself Along.

Another way people can make lasting financial change is to set dates for changes to take place. This can help you to overcome procrastination, especially if you tell someone your intentions. It can also stop you from acting too soon, when you are not fully prepared. Dates give you a focal point in time that should correspond with a place and an action in your mind. When you put all three together regularly, you are far more likely to make improvements to your financial situation than otherwise.

Which are you more likely to deliver on, goals or promises? Studies have shown that people are over 80% more likely to deliver on a promise than a goal. A good way to ensure that you’ll take the steps you need to take is to promise someone that you will take them. A supportive friend, spouse, or parent will take in such promises and have faith in you. The more meaningful it is for you to keep your word with a person, the more valuable that person is for helping you take the financial steps you want to take.

For some people, preparing for even a small financial change is like preparing for major surgery. As the date approaches, it’s important to surround yourself with people who are supportive. It’s up to you to put everything else second. This can be especially hard if you are dependent on other people, financially. It often requires taking risks you are unfamiliar with taking. And other areas of your life may suffer while you take the necessary steps. All I can do is assure you that if it is done well, the change will be worth it. Financial Freedom often comes with growing pains.

The above list can help you to gather most of the information you need to make an informed and reasonable plan. Looking into it will likely produce helpful tidbits from people you know, articles and books you looked at or read, and observations you make on your own. Along the way, you will likely learn some false information, try out tools and techniques that don’t work, and take on attitudes that are counterproductive. The key is to be eminently pragmatic: Focus on what works, experiment where you can to be certain, and verify the information you get before you act on it. Money is a very emotional topic, and people want other people to believe their delusions. Be specific about what you want, seek to discover and overcome your misunderstandings about the world of money, include a variety of techniques for dealing with your obstacles, and pay attention to what’s going on in the world. A plan like this, one that is truly your own, will carry you farther faster than anything someone else can create for you.

Doing Due Diligence means Preparing Properly, not just Gathering Information.

The story of Alexander and the Yogi illustrates the power a Mindset can have over a person. The work of Phillip Zimbardo reveals the impact time-orientations have on a person’s long-term well-being. The Intersection of a person’s time-orientation and Money Mindset determines which choices a person will perceives in any situation. In the long run, selecting the best Intersection to use is the key to achieving true Financial Freedom.

Financial Freedom liberates you, not just financially, but socially and emotionally. By considering the personal utility of each Intersection, you can leverage the power of your emotions to attain it. Taking small steps can build your confidence and raise your level of commitment to changing your financial picture. The best strategy is to do your due diligence while making a well thought-out plan to become Financially Free.

* This is the second in a three-part series on achieving financial freedom. The first article can be found here, and the third article can be found here.

Bibliography

The following materials can help you to become aware of the effects of your Money Mindset and time-orientation, as well as get a thorough understanding of how to make a solid financial plan that you are motivated to follow.

Books
- The Time Paradox
- Canadian Securities Course Volume 1
- Canadian Securities Course: Volume II
- Rich Dad Poor Dad: What the Rich Teach Their Kids About Money-That the Poor and the Middle Class Do Not!
- Cashflow Quadrant: Rich Dad’s Guide to Financial Freedom
- Rich Dad’s Guide to Investing: What the Rich Invest in, That the Poor and the Middle Class Do Not!
- The Richest Man in Babylon
- The Millionaire Mind
- Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth
- The Millionaire Next Door
- Who Moved My Cheese?: An Amazing Way to Deal with Change in Your Work and in Your Life
- Changing for Good: A Revolutionary Six-Stage Program for Overcoming Bad Habits and Moving Your Life Positively Forward

Video
- Time-Orientations Explained