Investing can be one of the best ways to lift oneself out of poverty. With all the apps, brokerages, and services out there, almost everyone has access to financial markets. However, it is equally important to develop a wealth mindset and understand how being rich doesn’t necessarily mean wealth. Rich people often end up broke while truly wealthy people consistently earn more. This is why two thirds of lottery winners end up with nothing. Therefore, as we invest, it’s important to develop habits that aid us in our goals for financial independence. With that in mind, I made a list of the top 5 reasons why most people are broke. I tried to stay away from the obvious like “not working” or “doing drugs”.
#1 Gambling & Bad Habits
According to the American Gaming Association, Americans wager around $150 billion on sports every year. Much of this comes through illegal channels. At the same time, Americans spend an additional $70+ billion in lottery tickets according to the North American Association of State and Provincial Lotteries. In contrast, these same individuals only spend about $15 billion on books. So essentially, many people are spending a significant amount of money on activities that provide little to no value. At the same time, they aren’t reading, exercising their minds, or learning new skills.
#2 Depreciating Assets
I mentioned earlier being rich isn’t necessarily the same as being wealthy. Having nice things can be meaningless and only serve to make others jealous. Individuals who own fancy gadgets or expensive cars are typically leveraged up to their eyeballs. They live paycheck to paycheck and use credit to keep up the facade of wealth. I’ve personally witnessed people making $20k/year go out and buy $2,000 MacBooks. Even I owned a Camaro and then later, a Mustang in college. They were both fun cars, but the resources used could have been invested into income-producing assets. A vehicle, after all, is a depreciating asset.
We’ve discussed how inflation eats away at static dollars. According to Gallup, in 2008, 62% of Americans owned individual stocks. That number has fallen to 54% as of 2017. More adults prefer to have their wealth in housing or cash. On the surface it appears as if individuals were scared out of the market during the last recession. Even so, they’re getting killed by inflation. Cash is losing 2-3% annually. Housing, on the other hand, has additional expenses other investments don’t. If the AC breaks or the roof caves in one might have a nasty bill. The lawn needs to be mowed, the walls patched, and the floor re-carpeted. With inflation, home expenses, and risk associated with a declining neighborhood; many homeowners are lucky to break even.
#4 The Love for Money
Ironically, greed and the love for money actually plays a role in making one broke. For example, in my business I sell fasteners. If I overprice my fasteners I can pump up my paycheck for a month or two. This is an example of greed. In contrast, reasonable price points create more value. For one, competitors can’t come in and sweep away my business. And two, I build trust with the customer, develop a long-term relationship, and sell much more over the course of time. Too often people become misers, chase pennies, and fail to create value. The love for money also includes impulse buys, being unnecessarily cheap, and neglecting other aspects of life. Impulse buys tie into points one and two. To avoid being unnecessarily cheap one has to realize when spending money, again, creates value. For instance, a $500 course on investing might be expensive. However, will that $500 help one to earn $5,000 or even $50,000? Finally, being a workaholic to chase money has unintended consequences. One neglects their relationships and health. A person who is alone and sick isn’t wealthy.
#5 The Scarcity Mentality
It’s common to hate the wealthy, be entitled, and believe the government owes us. This creates a scarcity mentality. People hating others for their success only serves to cut themselves down. They believe they don’t have what it takes and that the wealthy only got there by hurting others. There is only so much wealth to go around. It’s a rigged system and they “deserve” to be better off. Finally, they support certain politicians in the hope of redistributing this wealth. I can’t do much with my life, so I need a safety net! These beliefs manifest in poor decision making. I’ll use three people I know as examples. One friend has been waiting for a six-figure job for two years. The 2nd admitted he’s “comfortable” in a $12/hr position. The 3rd friend is young, ideological, and took a low-ball offer to do what he loved. Thankfully, he’s moving away from this mentality, realizing he’s worth a lot more than $11/hr. He’s aggressively looking for a better position and in the process of getting a master’s. I told these friends all the same thing. Instead of hating the wealthy, focus on becoming the wealthy. There is enough wealth to go around assuming you’re able to bring value to the marketplace. Instead of binge-watching Netflix, take some time to learn a new skill. Get a side hustle. If the system is rigged, navigate around the system. You don’t need the government to help you because you can do a much better job at helping yourself. In doing so, scarcity turns into abundance.
These five reasons all have to do with psychology or our ways of thinking. Gambling and buying cool stuff make one feel good in the moment. Saving and holding too much cash are a manifestation of fear. Being greedy, resentful, entitled, and/or lazy undercuts the value one can provide to the world. Thankfully these pitfalls are all under our control. Education, skills, time management, and the right mindset can help one navigate through obstacles outside one’s control. With the right mindset a wealthy person will never go broke.