Here’s what normal looks like:
- Average household income: $52,000
- Average mortgage: $172,000
- Average student loan: $48,000
- Average auto loan: $27,000
- Average credit card debt: $15,000
Breaking this income versus debt into a monthly budget would look something like this:
- Monthly income: $2980
- Monthly mortgage payment: $1200
- Monthly student loan payment: $530
- Monthly car payment: $510
- Monthly credit card payment: $250
Leftover: $490
That’s not a lot of money leftover for expected expenses such as food, gas, phone, utilities, fun or fashion.
In other words…
Normal is broke. Don’t be normal.
There are various definitions of what being “broke” actually means. To some, it could be a negative net worth; to others, it could be a zero balance in a bank account. For the purpose of this article, let’s agree that a broke person is someone who constantly stresses about money because they never seem to have enough.
I’ve encountered many folks who fall into this category: friends, family members or neighbors.
Over the last few years, I’ve paid special attention to the common tendencies of this group to ensure I don’t follow in their footsteps.
In an effort to keep YOU from joining THEM as well, I present to you my findings:
5 Big Mistakes Broke People Make with their Money
1. Giving into Consumerism
Consumerism, in economic terms, generally applies to policies or ideologies that emphasize consumption. In theory, the common belief is that spending money helps to fuel the economy and, thanks to a multiplier effect, money I spend goes into someone else’s pocket – then, they spend it and it goes into someone else’s pocket – and so on.
In reality, though, people with this mindset typically end up broke. They tend to fall for creative marketing messages, they chase discounts and keep up with the latest trends.
Wealthy individuals tend to focus on producing rather than consuming. And the wealth they accumulate, they protect it rather than giving it away so easily.
2. Focusing on Side Hustles Instead of their Primary Job
There are thousands of articles encouraging people, usually millennials, to start a side hustle in order to earn extra cash. For example, here are 99 Side Hustles you Can Start Today or 29 Smart Ways to Make Money in 2017.
The authors of these articles have good intentions, but the content itself is extremely misguided. Here’s what I mean:
A recent article I read was written by a girl who explained how she made an extra $4500 in a year by taking surveys, blogging, dog-walking, etc.
It sounds awesome (who doesn’t want extra cash?) until you consider how much time went into earning the additional income. Side-hustles are usually a waste of time until you have maximized your income potential at your primary job.
If you’re paid hourly, there are overtime opportunities. If you’re paid commission, push for one more sale. If you’re paid a salary, take on extra responsibility and quantify your worth to get a raise. If these don’t apply to you, then learn a skill that will open up other opportunities. Take a course in Excel, learn how to code, etc. You’ll probably end up making $20-50k more a year, not just $5k.
3. Trying to Do Too Much Rather than Focusing on One Thing at a Time
In speaking with those who are deeply indebted, I’ve been pleasantly surprised to find that they usually know what to do with their money. They have 401(k)’s and are fully aware of Roth IRA’s and 529 plans.
The mistake they’re making, though, is trying to do a little bit of everything – all at once.
They contribute a little to their 401(k), pay too much for life and health insurance and contribute pennies to 529 plans and other goal-oriented accounts. They even pay a little extra on credit cards, car loans and other outstanding debt. But, at the end of the day, nothing is left over and progress usually stalls.
Harvard actually researched this by studying 2 groups with different strategies and found the most effective way to pay down credit card debt is by focusing on one card at a time.
Applying this approach to the rest of your financial life would look something like this:
(Once you have done the first thing, cross it off the list and move onto the next thing. The key is to focus on one thing at a time and build momentum. Be careful not to jump ahead to later steps.)
- Save $1000
- Payoff credit cards, medical bills (smallest to largest)
- Build a cash cushion (3 months of expenses)
- Contribute to your 401(k) up to your employer’s match
- Payoff car loans, student loans (smallest to largest)
- Save for things you want:
- Down payment for a house (20%)
- Roth IRA
- 529 Plan
- Max 401(k)
- Travel, furniture, etc.
- Payoff mortgage
- Give generously
4. Not Knowing Where they Stand
A lot of people do not know their credit score – even though every financial company offers it for free as if it’s chips and salsa at a Mexican restaurant. Others don’t know how much they owe or who they owe it to, what their interest rate is or what their 401(k) is invested in. It’s astonishing, but I also get it. If you’re overweight, you probably don’t want to step on a scale. If you’re broke, you’re probably too scared to look.
Lucky for us, there are a number of new financial technology (fintech) companies that make managing money extremely easy. Here is the one I use most often:
Personal Capital
Personal Capital is an all-in-one financial tool that allows you to:
- Track your net worth
- You can easily link all of your accounts to view everything in one place (checking, savings, 401(k), mortgage, credit cards, etc.).
- Manage your cash flow
- You don’t need to budget every penny to win financially, but you need to ensure what’s coming in exceeds what’s going out.
- Personal Capital will group all of your expenses into categories to show where your money is going.
- Analyze your portfolio
- When is the last time you reviewed your 401(k)? Do you know how much you’re paying in fees?
- Personal Capital will answer these questions and more and alert you if you’re invested too heavily in a certain asset class.
Even with all of the value Personal Capital provides, it’s free – so check them out.
5. Think Short-Term in Small Increments Instead of Long-Term and Big Picture
Perhaps the best (or worst) example of this is during a new car purchase. Everyone has to buy a car at some point, but the justifications from some show an inability to see the big picture. Here’s what I mean:
A wealthy person will buy a car for $30,000 and pay cash for it. They’ll drive it for 10 years then pay cash again for the next one.
A broke person will finance a $25,000 car over 5 years with a monthly payment of $450. After paying on it for 3 years, they get suckered into getting a new car even though their current car runs just fine. The primary benefit of the new car? A lower monthly payment.
To continue the example, this person only owed $10,000 on the car after 3 years; but the dealership talked them into extending the loan back to 5 or 6 years. It “feels” like they’re saving $50-100/month when, in actuality, they’re costing themselves an additional $15,000.
Lowering payments is one of the biggest selling tactics at car dealerships and they fool people all the time.
In closing, there are plenty of things preventing people from building wealth and/or causing them to become “broke”. Your goal should be to identify which tendencies are causing your money to disappear and to adjust your behavior if you want to build wealth.
*Per FTC guidelines, this post may contain affiliate links.
