The pandemic has caused many of us to view our finances in a different way. As a result, individual financial burdens have been magnified including high costs of living, healthcare expenses, taxes, and college tuition. For some people, these countless burdens can make it seem like they’ll always be poor — or at least “poor” by their standards.
Whatever your definition of “poor” is, there are strategies you can use to grow your wealth over time. Before you start building your wealth, it’s vital to recognize which habits are putting a strain on your finances. Here is my top 10 list of reasons that can lead to a poor mindset:
1) Spending Too Much on Housing
For most of us housing is our biggest expense. In fact, the typical rent or mortgage represents approximately 18 to 30% of a family’s income. Spending too much money on rent or a mortgage is a major reason people struggle financially. As a rule of thumb, you should try to keep housing costs under 20% of your income, as opposed to the 28 to 30% limit that most banks allow.
2) Lack of Multiple Income Sources
“Don’t spend more money than you make.” I know, it’s a lot easier said than done — especially in our materialist society of mass consumerism. The average American spends almost $18,000 a year on nonessentials. The good news is that you can correct this from both sides of the equation. Spend less to live within your means and work to earn more income so you have more financial margin.
3) Wanting It All Too Soon
Many people end up broke because they want too much too soon. This can especially be true for recent college grads who are transitioning from living on ramen noodles to having a livable paycheck yet still can’t afford a new house, new car, nights out, or vacations abroad. Funding these type of expenses can get dangerous when you start using credit, which may result in limiting your financial future.
Consider prioritizing your wants and then focusing on just one large purchase — leaving the rest for the future after you’ve had a chance to build up some savings.
4) Unwilling to Change Your Mindset/Behavior
The No. 1 reason people end up poor or in some type of financial hardship is due to bad behavior. I’ve heard several personal finance experts cite the 80/20 rule here. Your success in handling money is based on 20% head knowledge and 80% behavior. This is the part where I always mention behavior modification.
One of the main types of buying behaviors resulting in people becoming poor is purchasing depreciating assets like cars, ATVs, and boats, etc. Changing your mindset on how you view and invest in items that lose value will eventually help you escape the grind of living paycheck to paycheck.
A person’s actions have to change in order to take control of their finances. Are you willing to sacrifice to do this? Think about what changes you can start making in order to begin viewing money differently.
5) Not Sticking to a Budget
As a friend of mine would say, “The only entity that does not have to live on a budget is the federal government.” If you want to take control of you money and build wealth, having a budget is vital. A survey done by Mint cited that 65% of Americans have no idea how much they spent last month.
Unfortunately, many people still don’t have a budget or don’t stick to one, which can result in financial hardship. Despite your financial situation, a budget is almost always a necessity because it can help you determine where your money challenges are and what you can do to improve your financial standing.
6) Not Investing In Yourself
Another thing holding people back may be underinvesting in areas with long-term benefits such as professional career and education, savings, and investments. Don’t get caught overinvested and overextended yourself in other areas, such as luxury products or upscale housing. Instead seek out work-based training opportunities that are designed to improve your marketable skills to help advance your career. Ask your employer if they recommend (and will pay) for continuing education programs that could potentially lead to advancement opportunities.
7) Unable To Separate Wants From Needs
It can be difficult determining needs from wants because your brain will play tricks on you. Using the word need for almost everything you purchase, will cause you to actually believe you have to spend the money.
A good exercise would be to write down everything you’ve bought in the past week and put them into two columns—Needs/Wants. For example, if you have a fully functioning iPhone 11 and you buy an iPhone 12, that is a want, not a need. Or you might need a car for transportation, but you want the luxury model. This mentality keeps us down financially.
8) No Savings/Emergency Fund Priority
About 15 years ago the average savings rate in America was just 2.5%. Today, it’s closer to 10%. According to Bankrate survey cited by CNBC, 65% of Americans save little or nothing—and half could end up struggling in retirement. When you get paid, make sure you are saving those first few dollars for your future. A painless way to do this is set up an automatic transfer to your savings account after each pay period.
You’re savings account can also serve as your emergency fund. Start with a goal of always having $1,000 cash on hand and increase it from there. You will get ahead financially by making savings a priority.
9) Only Paying With Credit
Credit card interest rates have reached a criminal level with some in the 20 to 30% range. One of the biggest reasons you’re poor might be because you’re always paying with credit. When possible, consider paying with cash rather than a credit card. You’ll avoid the high-interest charges many credit card issuers charge.
10) You Haven’t Learned About Personal Finance
Educating yourself on personal finance might be the most important thing you ever do. Many people don’t understand the dangers of debt that comes from compound interest working against you instead of for you as it does with investments.
Education is the most powerful weapon which you can use to change the world.
Nelson Mandela
There are many sources of money education available that can increase your knowledge such as books, videos, webinars, seminars, church ministries, and financial coaches and advisors.
Consider changing your money mindset from “How can I spend money to make me happy today?’ to “How can I use this money to buy me financial freedom in the future?”
Final Thoughts
There are many things and life events that may cause you to develop a poor mindset. However, it’s important to recognize them and realize that you can overcome most of these challenges by making a few simple changes in your actions and behavior.
I hope my top 10 will help you create a list of your own in determining what things put you in a poor mindset and what you can do to break out of that frame of mind.
For more on my financial journey and thoughts from other unique individuals, check out my book Margin Matters: How to Live on a Simple Budget & Crush Debt Forever.