In a world filled with psychological biases, there is none more apparent than the “halo effect”. The “halo effect” is when someone is viewed as some Omni-prescient being due to his or her status.

This status may be due to positional goods (a.k.a Veblen goods) that signal one’s position or it could be due a status conferred by an authority. In the first case, a good example would be the conclusions people jump to based on the kind of car you drive; a person driving a Mercedes Benz or BMW is usually seen as someone with money. In the second, doctors or people who have some title (e.g. CFA, CPA, etc.) to their name as seen as authorities of some sort.

With the ‘halo effect’, the assumptions and presumptions are sometimes taken too far. For example, it would reasonable to assume that a doctor is knowledgeable about medicine and health but with the ‘halo effect’, sometimes people expect doctors to be knowledgeable about everything.  

Unfortunately, this halo effect is often present when it comes to getting wealthy. Many people assume that getting wealthy and being free from worry about finances is only something those with high-paying jobs or those who are really intelligent* can achieve.

See if you fall prey to the ‘halo effect by considering the following two people.

Person 1

Gas station attendant and later on in life, janitor.  His idea of a treat was his usual morning visit to his local coffee place. He always wore shabby looking clothing that even gave the impression that he was homeless.

Person 2

A-list actor. Earned millions from blockbuster movies screened in theatres around the world.

Who would win?

At first glance, the obvious answer seems to be Person 2. After all, if you earned millions in your lifetime, you’ve possibly earned more than most people even earn in their lifetimes. With that kind of a headstart, how can you possibly do worse than Person 1 who probably earns a wage than probably falls into the bottom 10% of any society?

Unfortunately, that’s true.

Person 1 accurately describes Ronald Read who left a US$8 million dollar fortune to charities and other institutions. And he isn’t an isolated example. Take the case of Margaret Dickson who left a US$1.42 million dollar fortune and Paul Navone who had a fortune large enough for him to donate US$2 million to charity. (full story here). In Singapore, there was a case of a retired primary school principal who left $1 million to her domestic helper (story here).

Neither of these people profiled had jobs that paid astronomical sums. In fact, Ronald Read, Magaret Dickson, and Paul Navone all had low-paying jobs while the Singaporean profile had a job that was considered upper-middle class but certainly nowhere near investment banking levels.

Whereas I got Person 2’s profile from something I read about Nicholas Cage (who had to declare bankruptcy) but that profile isn’t something out of the ordinary. I remember reading similar things about Johnny Depp and stories of lottery winners who subsequently lost it all also come to mind.

Sure-fire way to wealth

I read this the other day and I completely agree. You may not be the best investor out there who can consistently generate the highest returns year after year, but being disciplined about savings and being humble about potential returns will ensure that you get there.

The main reason why people in the Person 1 profile succeed despite the seemingly low odds is that they turbo-charge their returns with a high savings rate and let their returns compound. i.e. They put their head down, work hard, lead a simple life, and let time do the heavy lifting for them.

The main reason why people in the Person 2 profile do so badly despite the odds being in their favour is that they let lifestyle creep** take over and make terrible financial decisions. It’s the same with every company that earns too much cash and then blows it on silly projects that kill shareholders’ returns rather than add to them.

As the people in the first profile show, there is a way to wealth.

You just have to stick with the plan.

Conclusion

Before we go, I’m not saying that you shouldn’t study hard, or work hard to get a job that pays well. I’m saying that getting a high-paying job isn’t a necessary condition in order to get wealthy. Neither is a high intelligence.

Obviously, better-paid people who are disciplined savers and investors end up wealthy at a younger age and find it much easier to do so. Celebrities who are smart with their finances can parlay their sums into even greater sums (Oprah and Dolly Parton for good examples of this).

The point I wanted to make is that we need to strip the halo effect away and realise that most people could become wealthy if they wanted to. Being disciplined and smart about your finances matter more than high pay and intelligence.

 

Notes:

*I used the word ‘intelligent’ and not ‘smart’ because ‘intelligence’ usually refers to one’s innate cognitive ability and is largely immutable whereas ‘smart’ usually refers to one’s learned experiences. Even if you disagree, that’s the way I mean it here.

**Lifestyle creep is something that many people can relate to especially in this era of social media. Seeing other people dine at fancy restaurants or take holidays to exotic locations stir emotions that have people convinced that they too, need to experience the same things in order to be happy. People then spend extra dollars earned on nicer but unnecessary things. It’s particularly common among younger people who see 100 dollar t-shirts or 1000 dollar shoes as a necessity in order to gain influence among peers. It’s stupid but I know the feeling well because hey, I was once young too.

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