Most people spend their money to get the most utility – fun, food, whatever. Entrepreneurs spend their money to make the most money.
This one habit pretty much accounts for everything, and it’s a big reason why the rich get richer, and the poor stay poor.
Consider our average lottery winner. Most end up blowing their multi-million earnings in a few years because their mindset is to spend everything they have on the most utility. When most people buy a house, they get the biggest they can afford. If they get a pay rise, they go out and buy a new car. And when that’s not enough, they take out credit to buy more stuff.
To the entrepreneur this is madness. All money is a means of making more. As a sophomore Warren Buffett and a friend bought a used pinball machine for $25; within months they had expanded several-fold into a regular income. How many kids think like that?
From this single habit all else follows:
- Financial restraint. The budding entrepreneur delays their own gratification to maximise return. If you want to see a failed wannabe entrepreneur, look for one who’s spending frivolously (my own co-founder famously wanted to buy us both company cars in our first month of business; I declined). Well after they’ve made a fortune, most self-made wealthy people remain comparatively frugal; their lifestyles may be lavish, but they’re almost always spending much less than they earn.
- Develop skills that compound. Entrepreneurs even think of their own skills as an investment; whatever time they put in should have the greatest possible return. For example: creating software, leading others, spotting future trends. They are typically self-taught, and diligently so. They work to make themselves the type of person who would be wealthy.
- Own assets that compound. The sweat of your own brow will rarely make you rich. As entrepreneurs soon realise, the most efficient vehicle is generally ownership of a company; your own efforts combine with others. Bill Gates may be a smart kid, but he was never going to earn $50 billion from freelance programming. For this reason smart entrepreneurs hang on to every precious percent of ownership as if it were their last breath.
- Time and attention conscious. Time and our attention are the only truly finite constraints – incalculably precious and easily squandered. Successful entrepreneurs are absurdly conscious of the fact, and tend to become highly organised, intolerant of inefficiency and laser focused. Many famous figures famously wear the same outfit every day (Zuckerberg, Jobs) claiming that anything else is an unnecessary waste of their attention.
- Positive realists. To make smart gambles – and that’s what becoming rich entails – you need an honest appreciation of odds that few possess. Many of life’s truths are uncomfortable, complicated, or counter-intuitive, and it takes real effort to discern otherwise. But in the absence of perfect information, it helps to see the world in a positive light. Pessimists make poor entrepreneurs.
The above response is written by Oliver Emberton, Founder of Silktide, and it originally appeared on Quora.