I recently saw this video of Alex Hormozi where he talks about a speaking event he attended. At the event, the speaker wrote $1,000,000 on a large whiteboard. Then the speaker asked someone in the audience how much they make and they replied, “$50,000 per year.” So the speaker wrote $50,000 under the $1,000,000 and put a minus sign in front of it. Then the speaker said:
Did you know that it’s costing you $950,000 a year to not know how to make $1,000,000 a year?
The point of the story is that our largest financial cost isn’t our housing, food, or healthcare, but our ignorance on how to make more money.
As someone who champions raising your income (instead of cutting your spending) to build wealth, I’m in full agreement. Growing your income is the most reliable way to have more wealth in the future. Every dataset I’ve seen suggests so.
But before we start growing our income, we have to believe it’s possible in the first place. I don’t typically discuss beliefs and mindsets because it’s too difficult to prove whether one belief leads to better outcomes than another.
On the other hand, I also know from personal experiences that beliefs matter. Much of the success I’ve had as a writer comes from a single belief I had in early 2017—I can write one blog post every week. I’ve followed that belief for over 492 weeks in a row and it’s completely changed my life.
I was reminded of this after reading Nir Eyal’s latest book Beyond Belief. In it, Eyal argues that beliefs aren’t fixed truths, but malleable tools we can use to our benefit. To determine whether a particular belief is helpful, Eyal challenges us to ask, “Is this belief serving me or am I serving it?”
I loved this idea because it made me realize that many of our financial beliefs are either assets or liabilities. They either help us build wealth or hold us back. But, how do you know which is which?
Beliefs that are liabilities actively harm you or prevent you from living up to your potential. Things like, “If I keep gambling, I’ll eventually win big,” or “I could never make $100,000 a year.” Believing such things could ruin your financial life.
On the other hand, beliefs that are assets help you become your best self. Things like, “The best time to start investing is today,” or “I can overcome any financial difficulty.” Believing such things will help you improve your finances over time.
This isn’t just conjecture either—academic research supports it as well. In an article from Avantis Investors, researchers explored the impact of “financial self-efficacy” (or the belief that one’s actions can influence the future) and found that it was a direct predictor of financial stability. As the study notes:
We document a strong negative correlation between self-efficacy and financial distress. Individuals with high self-efficacy, measured earlier in life, are subsequently less likely to default on outstanding loans or fall behind on bill payments than their peers with low self-efficacy.
This is a prime example of a belief acting as an asset. Those who believe they can improve their financial situation achieve better results than those who don’t.
However, not all beliefs can be so easily categorized. Some beliefs masquerade as assets, but are actually liabilities. For example, take the belief that “The stock market always goes up.” While this will make you lots of money during bull markets, it could do the opposite during a bear market. If you believe that stocks only go up, you could panic sell and miss out on future gains when they inevitably crash.
Conversely, some beliefs that look like liabilities are actually assets. Consider the belief, “I’m not smart enough to beat the market.” On the surface, it might seem defeatist. However, anyone who knows the data understands that it’s actually an edge. Admitting that you can’t outsmart the collective wisdom of millions of people makes it more likely that you’ll outperform many of those who think otherwise.
A belief doesn’t actually have to be true to be an asset. What matters is whether it produces the right behavior. For example, believing that you can’t beat the market may be false, but it frees you up to focus on growing your income (or other more profitable things)
This is why beliefs are so important. They shape the way we see the world and the actions we take. And those actions ultimately determine our results. So if you want to change your results, you have to start by changing your beliefs. As Confucius once said:
The man who says he can, and the man who says he can’t, are both right.
Given this framework, ask yourself, “Which of my financial beliefs are assets and which are liabilities?” I’ve done this for a handful of my financial beliefs, which I’ve categorized below:
- Asset Beliefs
- Income is the foundation upon which most wealth is built.
- Markets (as a whole) generate wealth in the long run.
- Consistency is more important than allocation or timing.
- Liability Beliefs
- There is no such thing as too much diversification.
- I’ll never make it into Level 5 ($10M-$100M) without a drastic lifestyle change.
- Illiquid investments aren’t worth the returns.
My beliefs that are assets help me to build long-term wealth—my career, my ongoing investments, and perseverance.
Why aren’t all of my financial beliefs considered assets? Because some of them are based on my preferences and not necessarily what would maximize my wealth. I’d probably be richer if I were less diversified, less liquid, and more open-minded in my career.
But everyone has their preferences. Some people pay off their mortgage early even when they have a super low interest rate. I wouldn’t do this, but some would.
And that’s fine. As the saying goes, “Personal finance is personal.” Some of my beliefs are a huge benefit to me and others less so. I’m not 100% sure which is which, but I have my theories.
Happy investing and thank you for reading!
If you liked this post, consider signing up for my newsletter.
This is post 493. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data
