Listen to this, 73% of Millennials are now living paycheck to paycheck, and overall 60% of Americans are living paycheck to paycheck as well. If you want to build wealth, you want to ensure that your daily habits are not setting you back. I’ve spent the majority of my life thinking about money, and I’ve learned that if you’re able to avoid these common money mistakes (habits that keep you poor), you increase the odds to get what you want in life.
1. Avoid Paying For Status
The first habit that you should avoid is paying for status. Now, status is a hierarchy game that has been around since the beginning of time. Even when we were Neanderthals, we basically understood that as humans, we want to signal that we are better than other humans, “I’m better than you”.
Oftentimes, in our society, what that looks like is getting a better job promotion and then showing that off or having a better title. Maybe you buy more stuff like cars or luxury watches, etc. For example, most people that buy Ferraris are probably buying it for status. Sure, there’s going to be a minority of people that really appreciate the inner workings of a Ferrari. But most people that buy them just want to be seen, they want people to know that they’ve spent three hundred thousand dollars on a car.
What color is your big guy?
If Ferraris were as common as, say, your Toyota Prius driving down the road, would everybody still want one? Probably not. So you can see this evidenced with many Americans these days. They have over a thousand-dollar car payments. If the car payment is that high, that means the average car is selling for sixty-seven thousand dollars while being financed for 72 months.
That kind of shows me that people are focusing on the wrong thing. They’re probably focusing on, you know, showing off to their friends with a really high car payment. Instead, they should really focus on becoming wealthy and not having a car loan that they can’t afford just to impress people that they don’t really care about.
Now, the people that you should be caring about are your closest friends, but trying to keep up with your friends’ financial habits puts you on the fast track to becoming poor. As we get older and our friends start to become more successful and they probably make more money, their spending habits are going to change. And you’re going to feel that pressure to try to keep up with them. Humphrey shared a story about this.
Humphreys Story
So a few years ago, Humphrey (the one who shared the story) has a friend Christian who became really successful in the commercial real estate business. Basically, how he liked to spend his money was he was a huge foodie. He would start to go to all these Michelin-star restaurants. He would always be going to one or two-star Michelin restaurants, and he would just make recurring reservations at different places in San Francisco.
At first, Humphrey would oblige and would go with him. But then he started to realize, “Like, dude, I’m spending a hundred dollars every single time at the very minimum when I go out to eat with him”. At one time after they went to a Michelin star French restaurant, they were still hungry afterward.
So what did they do? They went and got Chipotle after the meal. That day, Humphrey basically learned that you need to resist the temptation to keep up with your friends, especially if it’s not within your means. So for Christian, it didn’t really matter if he spent an extra $100 or $200 on a meal every single month, but for Humphrey at the time, who wasn’t making that much money, it definitely made a difference.
2. Different Financial Paths
When it comes to personal finance, everyone’s on their own path and their own timelines. And what’s a good decision for you might not be a good decision for your friend, and vice versa. Also, if they’re a true friend, they’re going to understand that you have different goals in life. And they’re going to be okay and still be your friend even if you can’t keep up with them financially.
So, this sounds really counterintuitive, but you really need to look out for yourself when it comes to your personal finances. The reason is that other people aren’t going to do that for you unless they’re just like some super sympathetic friend or something like that.
3. Bad Consumer Debt
A little later on, we’re going to talk about a bad money habit that is pretty controversial, but for now, I want to talk about the concept of having bad Consumer Debt. And right now, the way that this is manifesting itself is with the rise of buy now pay later (BNPL) companies. These are also controversial, and they are the companies like Afterpay, Klarna, and Affirm.
They basically offer you a short-term loan so that you can go buy something that’s a consumer good, such as your Nike shoes, maybe you got some pots and pans or types of furniture like that. It allows you to buy something not within your means, and you would just pay them off in four different interest-free payments over time.
But the thing with these interest-free payments is there’s a catch. If you fail to pay on time, you’re actually charged late fees, and oftentimes, those late fees are going to be 25% of the value of the item that you bought. And that’s the whole point of these buy now pay later companies.
They know that you’re probably going to miss payments at least at some point when you’re using these because most people are not good with having debt.
What I Think You Should Consider
The best rule here that I have for myself and hopefully for you is that if you are considering buying something with buy now pay later, think to yourself, could I afford this item outright? And if you can’t afford it outright, then just stay away from buy now pay later entirely.
4. Not Saving For The Future
Earlier on, I said that paycheck to paycheck. Now, one way to fix this is just to plan a little bit better. A similar analogy might be a bodybuilder. You know that they have to meal prep and plan out all their meals for the week to ensure that they’re sticking to a good diet. Finance is quite the same. Saving money takes some pre-planning, but if you’re able to do it, you’re going to have a lot better time.
So, I have two steps that I like to take. The first step I like to do is to actually automate it. What you can do is just go into your online banking, create a recurring transfer, so every time that you get paid, five to ten percent of your paycheck goes into a new savings account automatically.
Step number two, I know that this sounds really intuitive, but many people don’t do it. You want to go and look at your credit card statement and see where you’re spending money on your wants or your discretionary expenses. Oftentimes, people don’t even realize how much money they’re spending on their favorite things such as eating out, perhaps exercise classes, or seven-dollar lattes. No matter what it is, if you can trim just even some of your discretionary expenses and start to save that difference instead, you’re going to be a lot better off in the future with building your wealth.
5. Impulse Purchases
Now, an area of spending where it’s easy to become impulsive with is if you’re spending money on your loved ones or your friends. Oftentimes, our emotions get the better of us in these cases.
You might be waiting in the checkout line at your grocery store, or maybe you’re in a new city and you go to a “knick-knack” shop and you see something that’s perfect for your friend’s sister’s brother, his daughter, or whatever. It’s so cute, are you me, capitalism really popped off today, ladies? You decide to buy that one thing impulsively and spend that money. Another example is if you’re scrolling on Instagram and you see something that’s really great for perhaps one of your friends, you decide to buy it right then and there.
However, did you know that impulse purchases actually account for 40% of all the money that’s spent on e-commerce? And that these e-commerce websites are literally designed to upsell you on products? So, actually, 64% of impulse shoppers actually purchase additional items with their intended purchase.
Compounded Spending Effect
So, if you think about this, this is a compounded spending effect. You had the impulse to buy the original item, and then all of a sudden, you got upsold at the time of checkout, which means that you basically made an impulse purchase on top of an impulse purchase, which definitely hurts.
The worst part of all this is that you’ll probably put the impulsive purchase on a credit card, which means that if you don’t pay off that credit card on time, you’re going to be charged interest payments on your debt. Interest rates on credit cards can be well over 20%. So, that means if you’re just making the minimum payments on your credit card, especially after you make some purchases, that could be your next money mistake.
6. Minimum Credit Card Payments
By paying just the minimum on your credit card debt, you could actually accrue so much debt that you become what’s called a debt spiral. That’s where you accrue so much debt that the incoming paychecks that you have aren’t enough to pay off the interest that you have on your total debt balance. And I’ve actually seen this happen in real life to people. It is really, really crippling. Once your debt starts to spiral out of control, I mean, it’s really hard to climb out of that. So, we want to make sure that we just avoid that altogether.
The Interest Rate Effect
So, there’s this really crazy example that I like to use, which is that if you bought a new shirt for a $100 and you just made the minimum payment on a credit card over time, guess how much interest you would pay on that $100 shirt? The total cost of that shirt would actually be $214.
So, if you just make the minimum payment all the time, it could actually end up costing you double to buy that same t-shirt. If your credit card interest rate is say, 18%, you want to be making those payments first. Like, that is the best financial decision for you because the S&P 500, the market, returns about 8% on average per year.
However, if you can pay off your credit card debt at 18%, that’s actually guaranteed ROI on that cash. So, that’s just something to note, if you do have credit card debt, that’s usually the best use of your money right away.
7. Frugality
Now, earlier in this article, I mentioned that there was a money habit that was pretty controversial, and I want to share with you guys what that is. And it’s actually being cheap. Frugality is a great way to increase the difference between what you make and what you spend.
However, being cheap when it comes to certain items can actually cost you more money in the long run. For example, you figured out that you had a damage to your car and it needs to be checked. So you took it to the dealership to get a quote for it, and the fee was $2,500, which you thought was absolutely insane.
Let’s say you ended up taking it to a cheaper mechanic that said it would only cost $400 to repair. I might be thinking to yourself, “Man, this is perfect. I just saved, $2,100 by going to a cheaper mechanic and not letting the dealership rip me off.”
Well, after fixing, you’ll likely return to the cheap mechanic again and he’ll basically just patched up the wires because he didn’t want to take out all the parts required to make the full, actual proper fix.
Getting Quality
Oftentimes, you’re going to see this in life. You can go with a cheaper type of service or a cheaper product. So, let’s say you buy a really cheap T-shirt that’s going to last you a certain amount of time, but you’re probably better off just buying a really high-quality item that’s going to last you a long time. And that way, you’re not spending so much money every single, let’s say, two or three months buying new T-shirts.
For certain things that you know that you’re going to need quality for, don’t be cheap because it might actually cost you more money than intended.
8. Subscriptions
Now, speaking of things that might be costing you more money than you think, subscriptions are actually something that I want to talk about. We often forget about canceling unwanted subscriptions, and they can actually cost us a lot of money.
In fact, 51% of Americans say that they have unwanted subscriptions, and oftentimes it’s because of the free trial that you’re offered. You sign up for a free trial, you forget about the recurring payment, and all of a sudden, you have all these payments that are adding up.
So, this is true even for me. I was paying for a service, and I probably used it once a month at most, if that. And so, what I like to do is every quarter or every half-year, I like to look at my statements and just do a quick assessment of, whether am I spending money on the right things. My personal standard is that if I don’t use the subscription service more than once or twice a month, I just cancel it.
9. Tracking Expenses
You could be wasting hundreds of dollars every single year by not keeping track of your subscriptions. And so, a really good way to mitigate this is just to track your expenses, which I think many people don’t do. Now, you don’t have to track your expenses to the exact cent or not track a dollar. And I’m not saying that you have to be as extreme as that, but there are actually three benefits to tracking your expenses that I think we should talk about because they could really improve your financial life.
Benefits Of Tracking
Number one, the mere practice of tracking my expenses actually gave me some insight into what categories I spent a little bit too much money on and that I could trim back.
Number two, I know that this might sound a little bit corny, but by tracking my expenses every single day, it was a consistent daily habit that kind of showed me that as long as I do something consistently, I can become more successful over time. It’s this basis of consistency, of doing a little bit every day, that’s helped me grow a lot of my businesses.
Number three, it made me really good with money. By knowing how much money I was spending and how much money was coming in, I just had a really good sense of, “Hey, how much am I spending this month? Is it too much? Am I spending too much on certain categories?”.
But basically, by doing that, it’s giving me a lot of joy and a lot of fulfillment to do that, and so I’ve just become really good at money through this practice of tracking my expenses.
Now, if you don’t track your expenses, is it still possible to become wealthy? I would say yes, it is still possible, but everything becomes a little bit harder. Honestly, the amount of effort that is taken to get a ballpark sense of how much you’re spending is one of the best returns on your time. So, I would definitely consider that if you’re thinking about trying to get better with your money.
10. Not Investing Sooner
Another great return on investment activity is actually not investing sooner. Investing is something that many people don’t start soon enough. One of the first places that your money should go after your debts and your needs are paid off is to start investing, hopefully in a retirement account like the 401(k) or the Roth IRA, or just simply a standard brokerage account.
By saving a percentage of your income and investing it, you can start to compound your wealth a lot faster.
Let’s say you’re the age of 25 when you start investing and you’re able to put $5,000 a year into your retirement account, getting a 7% average return from the market. By the time you’re 65 years old, you’re going to have an ending balance of a million dollars and some change.
Now, take a look at this contrasting situation. If you wait till the age of 35 to start investing and you start doing $5,000 a year and trying to compound that same amount, guess what? By the time you’re 65, you’re only going to have an ending balance of around $500,000. Subtracting out 10 years of contributions of $5,000 a year, that actually means that the difference is over $45,000 because you didn’t start earlier.
So, I urge you guys to look into investing as soon as you can. I have a lot of articles on how to start investing, especially if you’re a beginner, that you can check out after this article.
11. Leverage Tax Code
Now, the beauty of investing, let’s say a Roth IRA or the with it, and so this is actually a mistake that many people make, is that they fail to leverage the tax code. This will hurt you and prevent you from building more wealth. And so, the richest people in the world, they spend a lot of time on mitigating their taxes and making sure that they’re taking a lot of deductions that they’re eligible for.
The super rich will avoid paying taxes by setting up foundations, family offices. They might even move their primary residence in order to save a buck. But even if you aren’t super rich, there are some common tax deductions that you can take to save a bunch of money.
Besides your retirement account, you can deduct the mortgage interest from your mortgage from your taxes, especially if the mortgage interest exceeds the standard deduction. You could also open a 529 plan for your kids or contribute to a health savings account.
Here’s a blog post with all the common tax deductions that you can take advantage of, and hopefully, that’s going to help you save some money. If you’ve read this far, thank you for reading. Let me know what you think about this article. Peace and Happy Hustling!
