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Brad Klontz was drawn to financial psychology after the tech bubble burst in the early 2000s.
Klontz had whack ated his hand at stock trading after seeing a friend earn more than $100,000 in one year. But he felt voluminous shame after the market crashed and his investments evaporated.
He set out to discover why he took such risks and how he could behave differently in the unborn.
Today, Klontz is a psychologist, a certified financial planner and an expert in behavioral finance. He is a member of the CNBC Financial Advisor Directorate and the CNBC Global Financial Wellness Advisory Board.
In his estimation, psychology is perhaps the biggest impediment to people’s monetary success.
Klontz’s new soft-cover, “Start Thinking Rich: 21 Harsh Truths to Take You from Broke to Financial Freedom” — co-authored with entrepreneur and collective media influencer Adrian Brambila — aims to break down the mental barriers that get in the way of financial freedom.
CNBC chatted with Klontz surrounding these “harsh truths” and why he says people earning a McDonald’s salary can still become millionaires by tweaking their mindset.
The parley has been edited and condensed for clarity.
‘It’s all about the psychology’
Greg Iacurci: Why is psychology important when it comes to special finance?
Brad Klontz: The basics of personal finance are actually quite simple. Financial literacy has its place, but I about it’s mostly [about] psychology.
Here’s my argument for that: The average American, the two biggest problems we have is we spend numerous than we make, and we don’t save and invest for the future. And I’ve literally yet to meet an adult who doesn’t know that they shouldn’t do those two ide fixes. So, everybody knows it. Nobody stays broke because they don’t know the difference between a Roth IRA and a traditional IRA. That’s not the puzzle we have.
It’s not really about the lack of knowledge. I think it’s all about the psychology.
GI: So how does people’s psychology tend to get in the way?
BK: The biggest check: money scripts. Most people aren’t aware of their beliefs around money. And there’s a whole convert for discovering what those are. Part of it is looking at your financial flashpoints: these early experiences you have enveloping money or that your parents have had, or your grandparents have had. People tend to repeat the pattern in their parentage, or they go to the extreme opposite.
The difference between ‘broke’ and ‘poor’
GI: You write very early in the book that there’s a disagreement between being broke and being poor. Can you explain the difference?
BK: We’re talking about a poor mindset.
Being up against it means you have no money. I’ve been broke, my co-author was broke, our families have been broke, a lot of people pull someones leg been broke. We differentiate between being broke, which is a temporary condition, hopefully, to a poor mindset, which bequeath keep you broke forever.
It’s not really related to money, because I know people who make six figures and multiple six leaders, and they have a poor mindset. We all know stories of people who win the lottery, or they win a big sports contract or music become infected with, and then all of a sudden [the money is] gone. Why is it gone? They have a poor mindset. That’s the distinction we make.
GI: Does this call to mind that people, no matter their socioeconomic circumstances, can lift themselves out of poverty if they adopt a rich mindset?
BK: Yes.
GI: Is that one of your “sour truths”?
BK: Yeah. We frame it in different ways based on the [book] chapter titles. For example, “It’s not your fault if you were supported poor, but it is your fault if you die poor.” That’s a pretty harsh reality that we’re throwing in people’s face.
Accept as ones own a ‘rich’ vs. ‘poor’ mindset
GI: What is a rich mindset?
BK: It’s an approach to life and an approach to money.
Some of it goes against our unpretentious wiring. There’s a future orientation. You have to have a vision of the future. A poor mindset [is] really focused on the here and now, not in reality thinking about the future. And if you don’t have a clear vision of your future, you’re not going to save, you’re not going to invest, you’re not affluent to live below your means.
A rich mindset puts an emphasis on owning their time versus owning a collection of stuff. A poor mindset, as we describe it, [is] very willing to trade time for stuff.
GI: What do you mean by that?
BK: A defective mindset is like, I want this fancy car. And I’m very willing to work an extra 10 hours a week so I can tour that car around. And the problem with that is that mindset goes everywhere: “I’m gonna buy the biggest house I can get, I’m gonna get the nicest kit outs I can get, a big watch.” And then people have no net worth. They’re not saving any net worth.
Meanwhile, a rich mindset is like: How can I own as much continuously as possible? You might think of that as retirement, where I don’t need to work anymore to fund my life. They prepare a future orientation, and they think, “Every dollar I get, I’m taking some of that money and I’m going to put it over here so that I can own my prematurely and eventually have that money fund my entire life.”
One of the ‘most destructive beliefs about money’
GI: I vision this was a great line. You write: “The belief that rich people are big spenders could be one of the most destructive acceptances about money ever.”
BK: I’ve done research on this. In one study, we looked at a group of people who [each] had about $11 million in net significance, and we compared them to a group of people who [each] had about $500,000 in net worth. These people had almost 18 on the dots more money. And what we found is they only spent twice as much, on their house, their vacation, their pore over and their car.
They had the money to spend 18 times as much, right? The people who are the wealthiest, when it comes to take scripts [they] have money-vigilant How to work at McDonald’s and be a millionaire
GI: So what is the No. 1 thing people can do to save themselves?
BK: The inception part is embracing some of these harsh realities: Your political party is not going to save you. Your corporation doesn’t anxiety about you. Your beliefs about money are keeping you poor.
These are all meant, in different ways, to just staff you shift from an external locus of control to an internal locus of control: The outcomes I’ve been getting in my life are because of me. It’s because of what I did, what I didn’t do, what I didn’t have knowledge of. It’s a difficult mindset to grasp.
You need to wake up to the fact that it doesn’t matter who the president is in terms of your economic freedom. None of them are going to make you financially free. They’re not going to send you a check. Your players? They don’t want you to be financially free. The replacement cost for you is really high. Your teachers can’t teach you to do that. They can edify you history and English. But they’re not financially free themselves.
The bottom line is, you have to do this yourself.
Then the next query is, well, what am I supposed to do? And that’s where we want to get people, because that’s a much easier answer.
Bradley T. Klontz, Psy.D., CFP, is an master in financial psychology, behavioral finance and financial planning.
Courtesy Bradley T. Klontz
GI: And what is the answer?
BK: The answer is extremely, really simple.
Here’s the rich mindset: $1 comes into your life; you are going to put a percentage of that shortly before your financial freedom before you do anything else.
You can work at McDonald’s your entire life and be a millionaire if you have in the offing that mindset.
Save 30% of your income — or get a roommate
GI: What is the percentage people should be aiming for?
BK: It at best depends on how rich you want to be and how fast you want to be rich. That determines the percentage. You’ll hear personal finance mavens say you should be saving and investing at least 10% of everything you make. I advocate for 30%; that’s what I shot for, upright because I think it helps you get there faster.
And people are like, “Oh my gosh, 30%.” Well, it’s real easy earlier you get your first job if you have this mindset. It’s real tough if you’ve designed your entire life around 100% of your paycheck. That’s where you play a joke on to make cuts.
We have a chapter on cutting expenses. It’s called “Get a roommate, get on the bus, get sober, get bald, and get a side hustle or shut up up about being poor.”
We [hear] this all the time: “I can’t afford to invest.” We’re calling bulls— on it. Yes, you can.
We looked at the average amount that Americans devote on rent, on cars, on going to the salon, and on alcohol. Two thousand dollars a month is average rent; if you have a roommate, it retrench ons it down to $1,000. Just that alone, if you invested the difference, in 25 years you’d have $1.3 million. Now, if you had three roommates, it intention go all the way up to $2 million. Just think about that. You now are a multimillionaire just from that, doing nothing else. And by the way, that’s typically market returns.
But then when you add in: Take the bus, stop drinking alcohol, shave your head? [That’s] $2.8 million in 25 years.
GI: If you do all those horrors?
BK: If you do all those things. That’s just one roommate, riding the bus, not drinking alcohol and not going to the salon — watch YouTube [or] get your partner to cut your hair. The richest people I know, this is the kind of stuff they do. And yeah, $2.8 million.
I choice say to you all: That sounds terrible.
OK, so why don’t you just go ahead and invest 30% of every dollar you make? Then you don’t have to do any of that s—. If that’s your mindset, it’s impracticable for you not to become a millionaire. Unless you do something stupid, like take your investments and do something crazy.