8 Ways to Trick Yourself Into Becoming Wealthy

by | BiggerPockets.com

“It’s not how much you make, it’s how much you keep.” —Robert Kiyosaki, Rich Dad Poor Dad

The balance in our investment account wasn’t getting any bigger. I’d studied the ways of wealth building and knew what to do. I had tattooed the “pay yourself first” principle on my brain. We had a budget, and right there at the top was a line item for setting aside 15 percent. Still, every month, there seemed to be something “unexpected” that would pop up and derail our efforts to set aside money for investing.

In The Total Money Makeover, author Dave Ramsey suggests that success with money is 20 percent head knowledge and 80 percent behavior. That seems about right. In my experience, most people at least have an idea of what they’re supposed to do with money. Some of us even study it extensively. And I know for a fact that good money habits are not rocket science. But actually doing what needs to be done can seem very difficult—at times, impossible.

Even with the best of intentions, it takes more than knowledge. Sometimes, we need to actually fool ourselves.

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Artificial Scarcity

When it comes to mindset for growing our wealth, we need to abandon the “fixed pie” or scarcity mentality: the belief that there is only so much money to go around. According to this worldview, if one person has more money, then it must have been taken from someone who now has less. Instead, we must replace this thinking with an abundance mentality: the belief that there is more than enough money in the world for each and every one of us to prosper and become wealthy. (There is.)

But while the abundance mentality is effective when thinking about how to earn money, it is exactly the wrong approach to managing the money that you have already earned. If you believe that money is easily replaced, then you will also spend more freely. Easy come, easy go.

A simple concept from the book The Millionaire Next Door by Thomas J. Stanley and William D. Danko has laid the foundation for our approach to managing our money. Stanley and Danko studied the very question of how the wealthy manage their finances:

“How did they become millionaires? How do they control spending? They create an artificial economic environment of scarcity for themselves and the other members of their household” (Stanley 41).

When managing the money that they have already earned, the wealthy tend to adopt a scarcity mentality. In other words, we need to trick ourselves into believing that we earn less money than we actually do.

In this article, I’ll explore a number of ways to do just that.

1. Siphon money at the source.

Probably the most popular and widely adopted method of reducing income is to siphon it off at the source. With authorization, many companies will automatically make contributions to retirement accounts on behalf of employees. This means that the money has not only been set aside, but also invested, before ever reaching the employee’s bank account. Let’s face it, whatever money is in your bank account is at risk of being spent.

This approach to saving and investing allows you to make a good logical decision for your future when you are being rational. Later, when emotions get involved (“I deserve it”) you simply don’t have the money available to spend.

Some employers will actually allow you more options than just putting money in a retirement account. What if you want to save up a deposit for a rental property? Check with your HR department to find out whether you can siphon off additional funds into a savings account. Just be sure that you don’t have easy access to this account or that there are penalties for withdrawing money frequently and unnecessarily. Otherwise, all you will have managed to do is create an additional spending account.

2. Scale up your savings with your pay.

One of the advantages of siphoning off money at the source is that you can often set it up as a percentage of your pay. Whenever I’ve done this, I’ve had to fill out a form with HR/payroll. On that form, I’ve usually had the option to specify a dollar amount or a percentage. If you choose to set aside a percentage of your income, then, as your income grows, so will the amount that you set aside.

So, if you want to pay yourself first and set aside 15% of your pay, probably the easiest way to do this is to go into your HR department and fill out the form. The rest is automatic.

Because of just how easy and effective this approach is, I highly recommend it, especially if you’re struggling to get started with any savings and investment. The reality is, if you’re not controlling your budget, then you probably won’t even notice that the money is no longer coming into your account. Ironically, people on a strict budget are more likely to notice the difference.

3. Crush your mortgage.

Perhaps you are setting aside money for an investment, but there aren’t many good opportunities just now. Some big-time real estate investors will tell you that there are always opportunities. Maybe they’re right. But in the few years that I’ve been at it, I’ve observed that the market operates in waves. When it crests, prices are high and it’s usually a terrible time to purchase a cash flowing property. When the market troughs, however, prices are low and it’s time to buy. If you are in a crest, waiting for a trough, your money will be building up in your bank account. The problem with this is that you’ll earn interest on this money and then owe tax on those earnings. This makes no sense if you also have a mortgage payment for which you’re paying interest. 

It might make sense to ride out a market crest by paying down your debt. This allows you to get yourself in a better financial position by converting cash into equity and reducing debt. It saves money in interest payments. You can always borrow money against your home later with a Home Equity Line of Credit (HELOC) when the time is right for buying.

But beware: Paying your mortgage is not the same as investing. Taking this approach might make sense for a while. But it could tie up your funds if the bank won’t allow you to draw on your home equity when you’re ready to invest.

Always keep in mind that investing is the higher priority—you must plant seeds to grow a forest.

4. Set aside that phantom paycheck.

Do you get paid every two weeks? If most of your bills go out monthly, then you are probably tempted to average out all 26 of your paychecks over the course of a year and then divide those across 12 monthly budget periods. This is technically correct.

However, most months you will receive exactly two paychecks. Then, once every six months, it feels like you win the lottery when you receive an extra paycheck. If you’ve been counting on this paycheck, then your financial situation will likely feel like a rubber band: Your finances stretch tighter and tighter until this extra paycheck finally appears and the tension is released.

A better tactic is to build your monthly budget based on what you bring home in two of your bi-weekly paychecks. If you can live on this amount, then every 6 months, you will receive an extra paycheck that can be set aside for investing. This would amount to 7.7% of your take home pay. This may not seem like too much, but if you also siphon off, say, about 7.5% of your income into a retirement fund before your take home pay then combined, you’d be setting aside more than 15% of your income. Using several of these incremental approaches in combination could really help you to get where you’re wanting to go.

5. Invert the usual approach of investing only a percentage of your bonus.

Throughout my career, my employers have tended to pay out a modest annual bonus. I am very grateful for it. Still, it has usually been roughly equivalent to a phantom paycheck. This means that it’s also been pretty easy to just spend it. But when I consider what it could have amounted to had I invested the money, the only correct action is a face-palm.

These days, if and when I get a bonus, I usually take my wife out for a nice dinner and bank the rest of it in our investment account. This way, I invert or flip the usual approach of investing a percentage off the top; I only take a small portion off the top for spending while leaving the rest for investment.

Related: 4 Steps to Finally Tackle Your Debt—and Start Growing Real Wealth

Also, if you are siphoning money off at the source for a retirement fund or other investment savings, check with your employer to ensure that this applies to your bonus payments as well. This way, paying yourself first applies to all of your income, not just your standard paycheck.

6. Live on one income.

Do you have a dual-income family? Try putting together a household budget based on only one of the two household incomes. Set aside the second income for investment.

This may seem like a real challenge, but there are times in life when you must adopt this approach anyway. When my wife went off work to have our children, we were forced to adjust our lifestyle to fit within my paycheck. To do so, we got ourselves on a relatively strict budget. As my wife started back to work part-time, we chose not to increase our lifestyle to absorb the additional income. Instead, we set it aside for investing. As our kids head off to school, my wife is starting to work more hours. Because we are set up this way, rather than just spend more, we are poised to supercharge our investing instead.

Even if you and your partner both have steady incomes, this can be a great strategy. It will obviously be easier to adjust your lifestyle initially to live on the higher of the two incomes. This is a great start! But if you want to challenge yourself further, consider whether you can budget your lifestyle to live on the lesser of the two incomes. If you can achieve this, then not only will you be setting aside a significant chunk of money for investment, but you will also create resilience to the temporary loss of either income.

In our case, my wife earns an hourly wage. If, for any reason, she works fewer hours in a given pay period, this reduces the amount that we bring in. In contrast, I earn a salary. This makes my pay more consistent and easier to budget around.

frugality

7. Live on one semi-monthly paycheck.

Want to really challenge yourself? Let’s say you get paid twice monthly, on the 15th and last day of each month. Ask yourself a simple question: Could you live on just one of those two paychecks?

For some, this may seem impossible. But I wish I had asked myself this question when I was young and single. If I’d tried, I’m sure I could have figured out a way to answer “yes.” Instead, I spent it all when I could have been putting aside 50 percent of my income.

Imagine that.

8. Don’t grow into your new income.

Do you find yourself in the situation of having a sudden and significant increase in income—for example, a new job or a promotion that brings with it a significant jump in pay?

Ask yourself this question (or discuss with a partner): Can we be happy with our lifestyle exactly as it is today? Do we have any outstanding needs that must be fulfilled right now? For example, if you have children and are living in a dangerous neighborhood, maybe you should think about using your change of situation to provide a safer environment for you and your family.

But if you’re living in an acceptable neighborhood and you’re relatively happy, then maybe you can forego the extras. Sure, you’d love to have a bigger, nicer house, and more luxuries like a new car, and a big TV. But you’re actually doing fine.

Example

Let’s say you’ve been earning $55,000 (a rough U.S. household median income using 2014 numbers), and you just got a 10% pay increase by switching to a new job. That’s a gross increase of $5,500 before taxes. You will pay about 25% in taxes on the increase, leaving you with $4,125. If you are contributing to your retirement account at 10% of gross income then that contribution will increase by $550 annually. (See, you’ve already scaled.) This leaves you with $3,575, or about $298 per month.

This is where you need to get tough on yourself. Instead of using that money to increase your lifestyle now, ask yourself if you can be happy living as you are and instead set that money aside each month for investment. Perhaps you want to build up a fund to save for a deposit on a rental property. It could take a few years, but this is your chance to get started. Start setting that money aside. If you are more keen on stocks, then you could use that money to start creating a stock portfolio.

Related: A Case Against Frugality: Why Pinching Pennies is NOT the Best Path to Wealth

As an aside, always round up. That extra $298 per month available would prompt me to start setting aside $300 per month. It may not seem like much, but it forces you to shave $2 from somewhere else in your budget. This kind of trimming, done regularly, keeps you living a more lean lifestyle while you are building investments.

Conclusion

Sometimes you really do need to use additional money for day-to-day living. When I received my most recent annual incremental increase, I wanted to funnel all of the money into either our investment account or put it against the mortgage to pay it down faster. But my wife told me we needed money for other things. Our small children are growing up and starting to eat more; we were starting to run short on our grocery budget regularly. And we’re not exactly feasting like royalty. In addition, all of our insurance premiums went up, as they do every year. Pretty quickly, my incremental pay increase incrementally disappeared.

But because we siphon some money off at the source and this scales with our incomes, we at least managed to reap some benefit from the pay increase. And since we combine several of these approaches already, we can accept it when life occasionally does get a little more expensive.

As always, if you have consumer debt—anything other than your home mortgage—then you should first use any extra money toward paying off those debts. Once you have eliminated consumer debt, you have the opportunity to start saving for investment.

Any strategy you can adopt to fool yourself into setting aside more money for investment is a huge step forward. Combining several strategies compounds the effect. Creating an environment of artificial scarcity is a great way to trick yourself into becoming wealthy.

What method do you use to set aside more money?

Leave your comments below!

About Author

Brad Lohnes

In 2013 Brad awoke from lifelong financial slumber and took responsibility for his family’s financial future. His primary vehicle for wealth-building is buy-and-hold real estate. He is passionate about financial education and helping others learn the tools they need to take control of their money. Brad believes there is nothing more empowering than self-reliance.

28 Comments

  1. Jerry W.

    Brad,
    Excellent article. While you asked for more comments, you pretty much nailed all of them. There are the usual buy used cars instead of new things, if you truly are saving very diligently you have already done that.

  2. Mike Dymski

    It’s hard for many investors to understand that some people need to trick themselves to do the right thing financially. Saving and investing come naturally to many investors. For others, it can be very difficult…for some, they just can’t do it at all…they are interested in consuming rather than investing (and to each their own). I am not saying it’s not possible for them, they are just not capable or not interested. Contrary to popular belief, most people do what they want and wishes are not wants. This article best suits the population in the middle or the “very difficult” group that I mentioned. Thanks for writing.

    • Michael Le

      @Mike Dymski, I’m one of those investors who have a hard time understanding it but at the same time I understand how can it be helpful to many people. But I’ve always been a proponent of increasing your means instead of just trying to live below it. There is only so much you can scrimp save, and ‘trick’ after all if the size of your pie stays the same.

      • Mike Dymski

        I agree Michael…and Brad and others are likely helping people to cut the unreasonable excess rather than scrimp-ing to greatness. The amount of excess (and unawareness) in many families can be staggering (much more than you and I could ever relate to) and I have experienced it first hand with my step-children, who I now financially support.

      • Brad Lohnes

        Hi, Michael. I agree that increasing your means is very important. It’s just that it will be a waste of time if you don’t live within those means. Look at athletes and “rock stars” – so many of them burn through more many than many of us will ever see in a lifetime and wind up with nothing. Gaining control of finances is the first step, increasing income is the second step. At least, that’s my belief. 🙂

    • Dionne Brunson

      I worked at a popular brokerage firm for close to 20 years. I wasn’t a financial advisor but I saw over and over and over how we waste money as consumers. And even with that knowledge and first hand experience I still participated in frivolous spending. So, I can attest first hand how it happens and most times you don’t even realize it’s getting worse and worse over time. Eventually it becomes a bad habit. Bad enough that it’s takes time and reprogramming your brain to break the habit.

      • Brad Lohnes

        Hi, Dionne. This is why I write. 🙂 It’s not just based on personal experience. So many people that I see around me don’t have that kind of control nor maintain a long view. The vast majority of people seem to be “living in the now” even though it only takes a little knowledge and discipline to change the long-term outlook. Thanks for reading. 🙂

    • Brad Lohnes

      Hi, Mike. Thanks for reading and your comments. I know that some people “just get it”. They probably don’t know how lucky they are. There are also many nuances – when we first got together, my wife had an aversion to spending but didn’t really know what to do with money not spent. Meanwhile, I was a spender, but also had latent knowledge of what you’re supposed to do with money. Once we got things working together, good things started to happen. 🙂

  3. Marcel Pean

    Great read @Brad Lohnes! I am a millennial living in DC with a salary at or below the cost of living in this very expensive city, LOL! However, I still manage to save by 1) contributing as much as i can into my company’s Roth IRA, 2) automatic online savings account – when you don’t see it, you don’t miss it, & 3) finding ways to increase my income by delivering food with UberEats!

    Thanks again for the useful tips!

  4. Joseph Walsh

    Siphoning from the top, and living below your means. The exact advice my dad gave me in high school, if I had only “completely” listened. His was a little more simplistic:
    – Before your first pay check, if you can, enroll in your 401K at 15%. You’ll never miss the money, you never had it.
    – Second: set up your direct deposit to go to two accounts, with 10% of net pay to savings (or whatever percentage you can swing)
    – Third: every time you get a raise, increase each of these two percentages by 1%
    Follow these he said, and you can choose when you retire, and will be a multi-millionaire.

    the follow up, once Roth’s became a main-stream option and after you got your savings to whatever your target “emergency fund” level was: start using that savings (the 10%) and open a Roth. After 5 years, that can double to supplement your “emergency fund”

    And his bonus one: try to build your credit score to 750+, treat it like a high score in a “game”.
    Sadly, I was shell shocked by the crash and got out of for 5 full years…idiot. Still by having done some of these, I am now in a position where I might just be able to start the brrr strategy for better returns.

  5. Justin Koehn

    I like the article, but have questions about #3 – Crushing your mortgage.

    Typically, if the market crashes, that means that home prices go down because folks are unable/unwilling to pay as high of a price for homes. This means, that homes will also appraise for less (whether they are for sale or you are refinancing). If you have all that cash tied up in the equity of your home, it may not be accessible if the bank tells you your house is now worth less than it was at the top of the wave. Your loan on the house will not change when the market swings, but your equity might, so it may be risky tying your capitol up by paying down your mortgage.

    On the other hand, if you can’t get a 4% return on your money as you wait for a crash, maybe it is better to pay off your mortgage…?

    Am I understanding this correctly? I have never done a HELOC, but I assume the bank still cares about your LTV.

    • Brad Lohnes

      Hi, Justin. Thanks for reading and your question. You are absolutely correct.

      If you have a mortgage, my assumption is that you are at least making the minimum payment. So you are slowly paying down the mortgage, converting cash to equity over time anyway.

      Over time, you might be able to borrow that money back to purchase a rental at the cost of increasing your mortgage payment.

      If the property decreases in value, then the bank might not be keen to do this, though, it also depends how much you’ve paid off.

      Crushing Your Mortgage has this same risk as I mentioned in the article. The only difference is that you are reducing the amount of interest that you will pay by paying the mortgage faster and avoiding paying tax on interest for money that is accumulating in your bank account.

      But also consider the long term. While the property market does come in waves and can definitely go down, over the long term, it tends to go up. So with the exception of the odd major trough (2008, 1987, etc.) each successive wave usually takes things higher overall.

      It is not the only option. And certainly if you want to be 100% certain that you have access to your cash then it’s not the best option. There are risks and tradeoffs to consider.

    • Brad Lohnes

      Hi, Justin. Thanks for reading and leaving your comment. You are absolutely correct.

      The risk of your property value going down always exists. This doesn’t stop people from using it as a source of capital for purchasing investments. If you want to be 100% certain that you’ll have access to your money, then Crushing Your Mortgage isn’t the best option.

      But with the exception of some major troughs (1987, 2008, etc.), each successive market wave tends to take values higher overall. If you are also paying down your mortgage faster then you are reducing debt, reducing interest paid, and preventing yourself from paying tax on the interest earned on money accumulating in your bank account.

      There are absolutely tradeoffs to consider with this approach and it’s not for everyone.

  6. Brad Lohnes

    Hi, Phil. Haha – fake it until you make it. I hadn’t thought of it that way. 🙂 Cold showers!?! Well, that’s a bit too much for me. I don’t advocate living an impoverished life. 😉 Just trim whatever you can and make sure you’re setting some aside. Thanks for reading.

  7. Ian Njogu

    This was a great article. I have been practicing these habits for about 5 years. I can definitely say that these habits works. My preferred method is to have HR take a portion of my check and deposit into a separate savings account. That way I never see the money hit my “everyday” account.

    I think the challenge with most people is discipline. You have to make it a POINT not to touch the money in the savings account. It felt weird to me when I first started siphoning my check straight to a savings account but after a few paycheck I honestly did not feel the difference. This is a habit I think most investors need to form. When I bought my first investment property I had an extra mortgage payment but my income (bi-weekly check) did not change. I had to sacrifice my entertainment budget until the rehab was complete & rented. I did not use the money that goes straight to my savings account because I still wanted to pay myself first. I knew that I could find somewhere to save money (my entertainment) and use that for the extra mortgage payment.

    Just as before after the first month I got used to it and I found that I was just at happy spending more time at home as I was going out. Just make it a point to save and in little to no time you will realized that you are just as happy as when you were not saving.

  8. Ed Perez

    Great for people work for a company. I was one of them when I wasn’t working for myself. I was setting aside almost 25k per year towards my retirement, in addition to setting aside 5,500 per year for my IRA accounts. Because of it, I have accumulated a sizeable retirement portfolio.

    Now that I am self employed and no longer getting 26 pay checks from my former employer and the kids are now older, my funds are much more constraint. I have to set aside more money for the following:

    healthy food;
    car insurance (since the kids are now driving their own cars and are riders on my insurance);
    health insurance;
    Increase emergency fund; etc.

    Because of these expenses I incur per month and I am now self employed, I no longer actively contribute towards my retirement accounts. I just let the income from my rentals, within my self directed IRA accounts, build up my retirement portfolio.

    I also stopped contributing to my kids 529 plan accounts, I just let the rental income from their own rentals (within their Self Directed CESA accounts) accumulate to help pay for their college expenses.

    Having passive income from our rentals is a great tool to have to help build our portfolios.

  9. Ed Perez

    Great article! I think anyone who is working for a company needs to take advantage of his/her company’s retirement plan. If they don’t offer any, investing in a traditional and/or ROTH IRA is equality important. When I wasn’t working for myself, I contributed the max allowed ($25k per year) towards my retirement plan, in addition to putting money into my IRA account ($5,500 then). I was able to do this because my wife was also working, also participating in her 401k plan. Because of our involvement, we accumulated a sizeable retirement portfolio.

    Now that I am self employed and no longer getting the 26 pay ckecks and the kids are so much older now, our funds are much more constraint because of the following:

    *funds for more healthy food;
    *Higher cost of car insurance since our kids are now driving their own vehicles and are the riders on our insurance;
    * increase of health insurance insurance;
    * increase of emergency funds; etc.

    The only thing that changed is I no longer actively contribute into my retirement accounts. I just let the income from my rentals (that are inside my self directed IRA accounts) fund my retirement portfolio.

    We also stopped contributing to our kids 529 plan altogether. We just let the income from my kids rental properties (within their self directed CESA accounts) help pay their college expenses.

  10. Rachel Luoto

    Thanks for writing this! There are SO many places to tweak a budget!

    Personally, I focused on cutting my biggest expense: Housing.

    My friends put about a quarter of what they pay in rent into savings; I put 4x my rent into savings 🙂

    Just by living a little further away, and renting a room in a nice home instead of a crummy inner city apartment

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