It’s no secret that most Americans are living paycheck to paycheck. What’s shocking is how little the average American knows about personal finance. As a result, Financial Coach Michael Lacy has shared 6 simple mistakes that keep you broke.
Not Setting A Monthly Budget- Your largest wealth-building tool is your income. Not deciding where your income goes before you ever have it is the best way to stay broke.
What we recommend at Black Sheep Finance is the zero-based budget. This system gives you the power over your money by having you give every dollar you earn a home. We do this before each month begins.
You determine how much fun you have that month, how much debt gets paid that month, and how much you save or invest that month.
It’s ridiculously hard to stay broke when you’re being that intentional. Actually, it’s pretty close to impossible.
Carrying Debt Around- The average American household has over $130,000 worth of total debt. Collectively, we owe over $1 trillion on, both, auto and student loans, $780 billion on credit cards, and over $8 trillion on real estate.
What this tells me is, we now believe that borrowing money to get the things we want is the only way to achieve success. In reality, those things aren’t measures of success or wealth, but, rather, a simple reminder of how much you owe to lenders.
Having nice things isn’t the problem. The problem comes when those nice things have you. The easiest way to avoid that dilemma is by saving up and buying things with cash.
Not Having An Emergency Fund- Not having money set aside to cover an emergency is detrimental, yet, despite knowing this, almost 50% of Americans could not cover a $500 emergency if something were to happen right now.
An emergency fund keeps a terrible situation from taking a turn for the worst. The last thing you need when your car stops working is to charge it to a credit card and get hit with interest and fees. How would you pay for an unexpected visit to the doctor if your kid were to get sick?
Your emergency fund should be between 3-6 months of standard living expenses depending upon your comfort level. It needs to be out of sight so that you’re not tempted to touch it, but it should be accessible should you need it.
Spend time figuring out the number that makes you comfortable, and focus on getting there once you’re out of debt.
Spending Too Much On Food- The very first time we took a look at our spending, my wife and I noticed that we had spent well over $1,000 on food. Seeing such an astronomical number for food was overwhelming because, at the time, that was more than our rent.
Since then, we’ve been very intentional about keeping our food spending under control. This issue is so serious we even wrote another post just on controlling your food spending.
Spending Too Much On Rent/Mortgage- The Black Sheep Finance recommendation for your rent/mortgage is 25% of your gross (pre-tax) pay. Is this difficult in some markets? Most definitely! Is it possible in every market? Absolutely!
Some markets may require you to have a roommate, take a 2nd job, move back in with family, downsize, etc.
Here’s the key to remember: You don’t have to live that lifestyle forever. The goal while you’re broke should be to do what you have to do, so that you can do what you want to do tomorrow.
If I told you that I would make you a millionaire if you could keep your rent/mortgage payments under 25% of your pay, would the sacrifices be worth it? That’s what’s on the line here. Those cost-savings invested properly could yield millions over the rest of your life.
Fear Of Investing- A lot of people have this irrational fear of investing in the market. They often ask, “But what if I lose my money?”
The only time you lose money while investing is when you panic and sell when prices are low. If you’re consistently selling and pulling money, you’re not investing, but, rather, gambling.
You see, when Nike has a sale on their items, people flock to stores and their website to purchase things they may not really need, however, when Nike stock goes on sale, the average person will panic and sell their shares instead of buying more.
This backwards way of thinking leads people to save their money in ordinary savings accounts instead of putting their money to work. The problem with this is, with inflation, most folks are losing money each year by just saving it.
For example, let’s say you saved $1,500 back in 2005. Would that $1,500 you saved go as far today as it did then? Of course not.
So not only did you lose money due to inflation, but you also missed out on compound interest during that time. Failing to invest in the market is a major mistake.
Correcting these 6 simple mistakes can be the difference between struggling to get by each year and retiring a multi-millionaire. Get with a Black Sheep Finance Financial Coach and create a plan to get you on the right track below.