On our need for structure and escaping the affordability mentality

Most of the articles I have written for Investing Architect revolve around strategies, ideas and plans you can apply and reach your retirement and wealth goals. But I am a firm believer that even the most brilliant of strategies would not be executed properly in the absence of the right mindset.

So, I’ve been thinking about a couple of concepts that can substantially influence our mindset and I’d like to share those thoughts with you.

structure

On structure

First, let’s look at an instance that most of us have had some experience with in their lives. You are in the market to purchase a car so you walk into a dealership. A couple of hours later you shake the hand of your salesperson and drive out of that dealership with your new car and a promise to pay $450 per month over the next 60 months for the privilege. Over the next five years you make that payment diligently by the due date and fulfill your promise by paying a total of $30,602.

So far so good.

But I’m really interested in what happens during the next 5 years. You would think that over the next 60 months that you don’t have a car payment, you should be able to put that monthly payment diligently into your savings and accumulate over $30,000 during that time. Right?

The truth is that almost never happens. And I am fascinated by the reason why. How could it be that we are more loyal and diligent to a bank or a car company but not ourselves?

The principal reason is structure. A secondary but still important reason is automation.

You might not have realized it at the time but when you walked out of that dealership they setup a clearly defined structure for you. They gave you a five year target to hit and interim monthly targets that you had to meet. The engine of achievement in our brains needs that structure, those targets and the “burn the ships” requirement to follow through. That’s the first reason why you didn’t manage to “save the car payment” over the next 5 years.

Now let’s take it a step further. What happened when you received your first payment letter? You signed up for autodraft or entered the car payment on your Bill Pay. In other words you automated the process and removed the burden of decision. When the next payment came due, it got withdrawn from your account regardless of how you “felt” that day. You probably didn’t even notice that it was gone till you looked at your statement later. That’s how automated the process had become.

The real estate investing lesson in all of this is that if you want to achieve lofty goals, you need structure. You need a Blueprint that gives you targets to hit and actions to take. When there is a lack of structure, you end up with a couple of rental properties and some Starbucks money each month but nothing more. And in the process you expend the most valuable resource you have: Time. Last but not least, real estate investing requires capital – in other words it requires your ability to save. How do you hit your savings goals? You make them automatic and you remove the burden of decision. Setup an autodraft for you, on the first of each month, before anything else is paid. And deposit the money into an account where you don’t have easy access to make withdrawal more cumbersome.

On escaping the Affordability Mindset

Let’s take it one step further still. It’s the moment before you leave the house to go to the dealership in the previous example. You need a car and you don’t have the option to pay cash for it. What’s the thought process in considering the potential car loan you’re about to take on later that day? Well, you make $90,000 a year and take home about $6,000 a month so you can easily afford the $450 per month payment. And you would be right. But it’s the right answer to the wrong question.

Sorry to break it to you, but the “affordability mindset” that is so ingrained in our culture, is simply the result of successful marketing campaigns. Companies selling anything from cars to furniture have succeeded in getting your attention away from the fact that you are paying a lot of money for something that goes down in value and toward the “affordability of your monthly payment”. They have succeeded in getting you to ask “what’s my payment” instead of “what’s the price”.

Look, I’m not here to tell you how you should spend your money. In earning the money, you have earned the right to use it however you see fit. What I’m here to do is offer a different mindset, a cashflow and wealth mindset. In the previous example, we looked at how a car payment saved for 5 years can amount to over 30k even with modest returns. We didn’t mention that the average family carries two such payments averaging about $800 per month! If this same family owned a rental property (140k, 20% down at 5%) and applied the same amount of those car payments (in addition to the cashflow) to aggressively pay down the mortgage, they could have the whole thing paid off in 6.5 years producing $1000 a month in income to boot! So, in roughly the same amount of time as the car payment plan, the same amount of money can accomplish so much more when applied to a different structure.

Those that adopt the cash flow and wealth mindset don’t play the game using the same affordability rules peddled by banks and companies. They ask about the real cost of things that includes the opportunity cost of not investing the money in a different structure that can make the difference for them in the long term. They understand that affordability doesn’t stop until every dollar they earn is already owed to some company before it hits your bank. They refuse to play that game and that’s why they accomplish different, much more ambitious goals.

Comments

  1. Dave Crockett says:

    Erion, You have hit the nail on the head. Of course too, that is why many of those same banks, corporate entities, & financial institutions don’t particularly care for those same folks that think the way you have outlined. Those folks just don’t make THEM the money. I have always thought the way you outlined, I just have not been able to make it happen the way I would like, even while living very conservatively. I just have not had enough left over to get it there. I do still admire & respect your strategies & thoughts.

    • Hi Dave

      Thanks for the kind comments. I have struggled with the same issue in the past. There was never enough left over to reach my savings goals. That changed when I read in “The Richest Man in Babylon” (STRONGLY recommend it) that “a tenth of what I earn is mine to keep” before I spend anything else. It changed my focus from saving what was left to spending what was left. I appreciate you reading and commenting.

  2. Sharon Tzib says:

    “Setup an autodraft for you, on the first of each month, before anything else is paid. And deposit the money into an account where you don’t have easy access to make withdrawal more cumbersome.”

    What do you recommend here? A CD? Beyond that I can’t think of anything else that isn’t pretty liquid.

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