They delay gratification.
This is the main difference between people who are wealthy versus people who are not. Being able to delay gratification has been one of the greatest predictors of someones likelihood to become wealthy.
This is because throughout your life, you care given opportunities to invest something now and get a larger return in the future. Some situations have a very direct and well defined value associated with the ability to wait. Other times the benefits are less clear and uncertain.
For example, investing or loaning money now will yield a return later. You trade $1,000 today for $1,100 next year, $1,610 in five years, $6,727 in twenty years. Investment vehicles are designed so that the longer you wait, the larger return you recieve. You are providing something that is valuable to someone now and in return they will pay you back with interest. This is the entire way that banks make money, they loan money to people who need it today and get paid back over many years. Over time, if you are the one lending and they are the one borrowing, you end up with all the money.
Other situations are a far less clear and carry a high risk of never paying you back. The upside is that these opportunities can also provide much higher returns. This is how education works, if you are willing to be discipline, work hard and develop talent for 20 years, you have an opportunity to get paid back 10x later in life. It is really hard to show up and do something for 20 years without a reward, especially if no one is forcing you. Children with parents who push them to get good grades, for them to do their homework and study and even provide small incentives along the way are much more likely to end up successful at the end. Some kids are left alone from a young age, no one checks their homework, nobody reads their report card, no one is pushing them across the finish line. It took me until I was about 19 and a sophomore in college before my parents quit pushing and I was able to carry myself. I think college has a lot of flaws and I’ve written pieces that are very critical of the system, but I’m not naive enough to not recognize that more years of education equals a better career for most people.
School didn’t just teach me basic skills like math and reading; it taught me investing time and money into something valuable now can create returns for rest of your life. It taught me that a lot of the good things that happen were set in motion years earlier. It taught me that spending a relatively small amount of time or money up front, can pay off 1000x later.
Wealthy people, and people who are on their way to becoming wealthy are very good at finding opportunities to delay gratification in exchange for a larger return. Conversely, poor people look for the quickest return. Often times, people don’t realize the money they are leaving on the table when they do this, they don’t realize that the quick dollar is costing them in the future. They also are often not in a position to wait. In a lot of transactions, the party who can wait longer gets a better deal. If you are broke, you cannot afford to wait a long time for payment. Or even worse, you have to pay a fee for an advance.
The worst situation you can be in is to be living paycheck to paycheck and using debt to make end meet. If you use a credit card to cover yourself between checks, you are paying a 20% penalty on that money. This would be the equivalent of getting paid 20% less every time your bank account hit zero. You need to either find a way to make more money or spend less. Making more money takes time, you will need to put work in now so that at some point later (possibly many months or years later) you will be in a better position. Spending less means that you need to develop an ability to wait before you buy things. If you do this, you will buy far less because many of the things you want or think you need today you can live without indefinitely, if you don’t buy it today, you might never buy it.
The second worse position you can be in is to take a lower paying position because they pay cash quickly. In our minds, it is natural to place a higher value on money we make today. Jobs that pay tips daily make us feel like we are making more money than we actually are. This is why companies like Uber or AirBNB have started offering their workers the ability to get paid on demand. Uber had a problem, driving didn’t pay well enough and a lot of drivers didn’t want to do it. To solve this they had a board meeting where people pitched ideas, the obvious was to incentivize a driver would be to pay a higher rate; instead they decided that they would start paying on demand so that drivers could get cash immediately. Uber drivers make less money today for the option to get paid quickly. They are effectively working at a discount in exchange for a quick cash high. This is Uber’s way of taking advantage of the most desperate workers.
The third scenario is just the opposite. Businesses manage their cash flow very carefully, it makes a big difference if they can pay their bills in 60 days instead of 30 days. Businesses, especially large corporations, have a discount rate which they use, typically around 10%, which they use to make spending decisions. This means if they can pay a bill quickly in exchange for a discount they will, or if they wait to pay for something, they will be willing to pay more. In the US labor laws dictate that employees be paid at least twice a month, businesses created a work around called the year end bonus. I’ve had positions where I get paid a base salary every two weeks, then get a large portion of the compensation at the end of the year. To accept a job like this, you must be willing to delay gratification and wait for your money. It also means that you have to stick around until the end of the year (often bonuses are paid in January or February of the following year) to get your money. These types of roles often also offer to pay part of your salary and bonus in company stock. Usually, the higher paying the job, the more money is paid this way. I’ve had jobs where half my income was in the form of bonus, stock options, and restricted stock. This means I had to wait months or even years before I got paid. Patience is key in this type of situation.
The last scenario is someone who builds a business. Someone willing to invest their time and money and live with uncertainty for a return that is far into the future. Most wealthy people have owned a small business at some point, it is likely their biggest source of wealth. When you start and grow a business, you usually don’t make a lot of money right away, you do it for a big payout in the future. In addition to whatever profits your company makes, you are building equity. Entrepreneurs can often sell their businesses for multiplies of the cash which they generate. Imagine taking a paycut today and in exchange someone pays you 10x your salary in five years to acquire your business. This is how wealth is created, most of the value an entrepreneur is not realized until they sell the business, for years rather than taking payout, their profits get reinvested and the value compounds.
It is natural to discount things which are far away. If something isn’t going to happen for several years, it is extremely difficult to motivate ourselves today. Ask someone who is 60+ years old, they undoubtedly have something that they wish they would have done when they were young that would help them now, investing for retirement, taking care of their health, developing strong relationships.
Impulse decisions rarely help us long term, we make them out of fear and excitement, they are a temporary fix that will be worthless tomorrow. Being patient, waiting for something we really value and investing for the future is what builds success.