When I started my journey toward financial independence, I noticed that there were two different mentalities I’d often encounter.
One mentality would be a scarcity mindset.
This mentality comes from a place of lack. Because there is limited time, money, and numerous other resources, one is constantly thinking about and weighing their opportunity costs. Our job may not be there tomorrow. We may not even be alive tomorrow. And so hoarding resources is a natural response to this viewpoint.
Within the framework of financial independence, this would be a saver. Someone who is naturally frugal, believing that saving more/spending less money is the true path to ultimate independence in life, would likely have a scarcity mindset.
The other mentality would be an abundance mindset.
This mentality comes from a place of excess. Because there is so much growth in the world – wealth, population, technology, etc. – one is constantly thinking about how to take advantage of so much of it. There is always a new opportunity around the corner to make more money, meet new people, and get further ahead in life.
Within the framework of financial independence, this would be an earner. Someone who is always angling to make more money, believing that earning a lot of money is the best way to achieve independence, would likely have an abundance mindset.
While some people – perhaps even a majority of people – believe these are competing mindsets, I don’t agree. I don’t think they’re mutually exclusive mentalities at all.
With the proper approach, I think they can actually be quite complementary to one another.
However, it’s important to make sure that the mentalities are used appropriately, as I’ll explain.
But first, let’s take a quick detour to have a larger conversation on abundance versus scarcity and why it’s important to realize that there’s plenty of both to go around.
What’s Abundant And What’s Scarce
If you’re reading this article, the odds are pretty good that you live in a developed country.
And if you live in a developed country, you’ll see abundance everywhere you look.
McMansions, luxury automobiles, expensive electronics, boats, vacation homes, top-notch infrastructure, skyscrapers, high-end restaurants, designer clothing. The list goes on.
So when you look around see this, you naturally begin to think the abundance mentality must have it correct. After all, with so much to go around, the party never ends.
Well, the problem is, scarcity is just as omnipresent as abundance in developed countries.
It’s just that you don’t readily recognize it.
But I can tell you it is there, lurking under the surface.
Time, flexibility, freedom, autonomy, options, choices, and opportunities are all extremely scarce for most people.
If you spend all of your time believing that abundance translates well to everything in one’s life, you’ll miss out on this important point.
And so, for most of us, financial independence is the solution to this problem.
If/when we’re financially independent, we can thus turn the scarcity of the aforementioned concepts into abundance (or at least as much abundance as might be possible). And it’s the abundance of concepts like autonomy that actually increases one’s happiness over the long run (not the luxury automobile, which will likely have the opposite effect over the long run).
And this is all while simultaneously enjoying the abundance that modern-day society offers, because much of the tangible things that have a positive effect on our quality of life (like electricity, running water, the Internet, easy access to food, etc.) are neither expensive nor scarce.
But which mindset might be the best one to adapt if we’re going to become financially independent in a fairly short period of time?
My answer is both.
But the key is the order in which you adapt them.
The Scarcity Mindset
The first mindset you must adapt is the scarcity mindset.
You must assume that your job might not be there tomorrow, because it very well might not be.
You must assume that your paycheck might not always be higher than it is today, because it very well might not be.
You must assume that you might not always be healthy enough or motivated enough to go out and work for an income, because you very well might not be.
You must assume that life can throw curve balls, because it can and will.
You must assume that it’s not what you make but what you keep that ultimately matters most, because it’s true.
You must first develop good savings habits. Otherwise, it won’t matter how much money you make.
I reached financial independence in about six years, starting in mid-2010 and finishing up in mid-2016.
And I did it on a middle-class salary, working at a car dealership for most of that time.
How did this happen?
It happened because I first adapted a scarcity mindset, believing that all of my resources were extremely finite and could become even more finite at any given moment.
And so my biggest priority in life became saving every red cent I possibly could.
I realized that there are a lot of people out there making a lot of money, yet they’re consistently broke.
Meanwhile, there are plenty of people out there that never earned much money, yet they went on to become fabulously wealthy.
Now, while I admire the janitor who amassed millions of dollars, I think there’s something to be said for balance.
Still, the point remains: if you don’t first acknowledge scarcity and develop good savings habits, it won’t matter how much money you make.
You could earn millions of dollars per year. But if you’re also spending millions of dollars per year, you’ll never have abundance of anything that actually matters. And you’ll certainly never be free of the need to constantly chase more and more, only to find that the never-ending rainbow leads to no gold.
Without the initial scarcity mindset in place, any acceleration in income will only likely result in an equal (or greater) acceleration in expenses.
As such, adapting an abundance mindset without first (or ever) adapting a scarcity mindset will find you in very short supply of a whole lot of many of the wonderful benefits of living in the 21st century.
But if you first develop the scarcity mindset and harness it properly, every extra dollar you earn can drop straight down to the bottom line, accelerating the journey toward financial freedom and the abundance that confers.
Once you adapt the scarcity mindset and get properly build your good savings habits, you can then move on to earning more money and dropping that excess income right down to your personal bottom line. You can thus save and invest even more, substantially speeding up the journey to financial independence.
The Abundance Mindset
Once you have the scarcity mindset firmly in place, it’s time to build on that with an abundance mindset.
There’s plenty of abundance in the developed world, as noted earlier. And there’s nothing wrong with taking advantage of that. You just needs to make sure it doesn’t take advantage of you.
I’ll give you a real-life example of this.
The first budget I ever posted online showed $3,386 in income and $1,542 in expenses for February 2011. That’s a net savings rate of 54.4%.
If we move forward in time to June 2015, we can see that I earned $7,745 and spent $1,915. I registered a net savings rate of 75.3% that month.
While the expenses were higher a few years later, much of it was due to having health insurance and business expenses (hosting).
Actual spending on my lifestyle was essentially unchanged.
But we can definitely see what changed in a big way: I was making a lot more money.
Once you commit the initial effort to right-size your lifestyle, there’s basically nothing else to do. The right choices become habit. You can then realign your efforts with making more money, improving your savings rate and substantially speeding up your journey to financial independence.
Due to this dynamic playing out in my own life, my savings rate increased significantly. And I was able to reach financial independence fairly quickly.
Once I embraced frugality and right-sized my lifestyle, it’s not something that required too much ongoing thought or effort. The scarcity mindset becomes practically automatic.
And so you’re freed up to make more money for as long as necessary.
And we can see this continue to play out, as I’m currently spending around $1,200 per month here in Chiang Mai, Thailand.
The funny thing is, I’m not even trying to save money or live frugally any longer. Seeking value comes naturally to me because it’s something that’s been part of my life for many years now.
My spending has gone down over time, not up. Yet my income has increased over time, not decreased.
And so all of the excess income I’ve earned has dropped straight down to the bottom line, increasing my ability to reach financial independence in a fairly short period of time and pursue the passions and opportunities the lifestyle allows for.
The result of first adapting the scarcity mindset, then adapting the abundance mindset, allowed me to lock in frugality while simultaneously getting raises at work and building an online business at the same time.
This all resulted in plenty of excess capital, which was used to construct the six-figure dividend growth stock portfolio that now generates the five-figure and growing passive dividend income I need to sustain myself in life.
What’s wonderful about this holistic approach is that the abundance mindset that’s adapted after the scarcity mindset will likely result in plenty of excess capital that can be steered into/toward investments that take naturally advantage of the very abundance that’s omnipresent in modern-day society.
I’ve worked extremely hard to build my portfolio, online businesses, and financial freedom.
But had I not first adapted a scarcity mindset, I wouldn’t have realized what’s truly scarce in modern-day developed society. Moreover, I wouldn’t have been able to save much (or any) of the money that came about from all of my hard work.
Likewise, had I not then adapted an abundance mindset after locking in good habits as routine, I wouldn’t have been able to make as much money resulting in a much lower savings rate than what would otherwise have been possible, severely delaying financial independence and this wonderful lifestyle in the process.
So there’s no competition here, only cooperation. These two mindsets are not mutually exclusive. They complement each other in a very holistic and powerful manner.
If you do it properly, in the correct manner an order, there’s no stopping you. Abundance in all facets of life will be yours. And the very abundance that will be available to you can and likely will also be paying you while you sleep, via passive dividend income from the global, high-quality companies providing all of this abundance. If that’s not having your cake and eating it too, I don’t know what is.
What do you think? Are these two mindsets complementary? Have you harnessed both properly?
Thanks for reading.
Image courtesy of: Sira Anamwong at FreeDigitalPhotos.net.
P.S. If you’re ready to adapt these two mindsets in a holistic and complementary manner in order to reach financial independence as fast as possible, check out some amazing resources that personally helped me do just that!