7 Hidden Habits Keeping You Broke: Financial Wisdom from Millionaires and Experts

In today's financial landscape, a staggering 41% of adults admit to lacking confidence in managing their own money. This isn't a reflection of laziness or irresponsibility, but rather a symptom of inadequate financial education. Many individuals struggle simply because they haven't been taught the habits that lead to true financial stability.

To shed light on this issue, we've compiled insights from millionaires, creators, founders, and financial experts to uncover the seven habits that are quietly keeping people broke. These habits may be invisible when you're caught in their grip, but become crystal clear once you know what to look for.

The Formula for Riches

One of the most valuable pieces of advice comes from a successful entrepreneur who shared his formula for building wealth:

Inflation + X * Time * Leverage * Compound Interest

Let's break this down:

1. Beat Inflation

The fundamental rule of making money is to first beat inflation. Many people aren't taught this crucial concept. For example, while inflation might be around 5%, banks may only offer 1.6% interest on savings accounts. This means your money is actually losing value over time if it's just sitting in a bank account.

To truly grow your wealth, you need to aim for returns that exceed inflation. This could mean:

• Starting a company that grows profits by more than 5% annually
• Investing in assets proven to beat inflation over time, such as:
  • Gold or silver
  • S&P 500 index funds
  • Real estate

2. Leverage

Leverage is about multiplying your efforts and resources. This can take various forms:

• Borrowing money from banks to start a business or invest in real estate
• Partnering with others who have complementary skills
• Using the internet to reach a global customer base
• Creating viral content to exponentially increase your reach

3. Compound Interest

The power of compound interest lies in consistency over time. Many young entrepreneurs make the mistake of giving up too quickly on their ventures. Success often requires years of persistent effort.

For example, one mentor shared a story about a 19-year-old entrepreneur who had started and folded three companies in just nine months. While the enthusiasm is admirable, this approach doesn't allow enough time for compound growth. A more effective strategy would be to commit to a single venture for at least three years, if not a decade.

Personal Finance Fundamentals

Beyond the wealth-building formula, there are some fundamental personal finance principles that everyone should follow:

Never Spend More Than You Earn (NSMT)

This may seem obvious, but it's a rule that many people struggle to follow. Credit card debt is a prime example of violating this principle. Even if you can only save 1% of your income initially, gradually increasing this percentage while leveraging compound interest can lead to significant wealth accumulation over time.

Pay Yourself First, Pay Tax Last (PYFPTL)

This principle is particularly relevant for entrepreneurs and business owners. When you're employed, taxes are typically deducted before you receive your paycheck, leaving you with what's left. This can be demoralizing, especially when you realize how much of your gross income goes to taxes.

By starting a company, even as a side hustle, you can gain more control over your finances. You can delay paying VAT for three months, claim back much of the VAT, and offset expenses to reduce your corporation tax and income tax.

The Danger of Short-Term Thinking

One of the biggest obstacles to building wealth is the prevalence of short-term thinking, especially among young entrepreneurs. There's a constant search for "hacks" or quick routes to success, whether it's through social media marketing agencies, cryptocurrency, AI, or NFTs.

However, true success often comes from compounding effort over time. The entrepreneur who sticks with their first business for a decade, adapting and evolving along the way, is likely to see far more success than someone who jumps from venture to venture every few months.

The Value of Living Below Your Means

Many successful entrepreneurs attribute their wealth not to extravagant earnings, but to consistent saving and living below their means. This approach allows you to accumulate wealth quietly, without the need for flashy displays of status.

One entrepreneur shared a personal anecdote about being able to buy a house at age 28, not because he had sold a company, but because he had consistently saved money for years by avoiding unnecessary expenses.

The Trap of Consumerism

A common pitfall in the pursuit of wealth is the desire to appear rich rather than actually being rich. This often manifests in the purchase of expensive designer brands and luxury items.

However, it's important to recognize that many of the world's richest companies are designer brands that profit from making consumers broke. Wearing expensive labels doesn't necessarily indicate wealth; in fact, it can often be a sign of lower self-worth and financial insecurity.

The Five Types of Wealth

To make progress towards financial goals without feeling overwhelmed, it's helpful to break down wealth into five distinct types:

1. Financial Wealth
2. Social Wealth
3. Time Wealth
4. Physical Wealth
5. Mental Wealth

By focusing on small, actionable steps in each of these areas, you can make steady progress towards a more holistic form of wealth. The key is to shrink the gap between learning information and taking action.

Understanding Your Relationship with Money

One of the worst money habits that prevent people from reaching their wealth goals is not understanding what money means to them personally. Many people are so caught up in societal expectations about money that they don't take the time to reflect on their own goals and values.

To overcome this, ask yourself:

• What does wealth mean to me?
• What are my life goals?
• How can I align my use of money with these goals?

By answering these questions, you can avoid the trap of saving, spending, or investing based on other people's milestones or expectations.

The Power of Paying Yourself First

For those starting from zero, one of the most impactful habits to develop is paying yourself first. Instead of waiting to see what's left over after expenses and discretionary spending, allocate a portion of your income to savings or investments as soon as you receive it.

This strategy works well due to Parkinson's Law, which states that work expands to fill the time available for its completion. Similarly, spending tends to expand to consume all available funds. By paying yourself first, you force yourself to live on less and find ways to make it work.

Prioritizing Financial Goals

When it comes to allocating money, there's a recommended priority checklist:

1. Save one month's worth of living expenses
2. Pay off high-interest debt (above 8%)
3. Maximize contributions to retirement plans
4. Build a 3-6 month emergency fund
5. Begin investing

While it may not be mathematically optimal to start with a one-month savings cushion, the psychological comfort it provides is invaluable.

The Illusion of Status

In the age of social media, there's an increasing trend of young people equating success with displays of wealth. This can lead to misguided behaviors like posing next to rented luxury cars or even fake private jets for social media photos.

However, it's crucial to understand that true respect and admiration cannot be bought. Wealthy and successful individuals are rarely impressed by such displays. Instead, they value things that require genuine effort and can't be easily purchased, such as:

• A fit, healthy body
• Strong, meaningful relationships
• Expertise in a particular field

These attributes demonstrate discipline, commitment, and personal growth - qualities that are far more impressive than material possessions.

The Reality of Building Wealth

Contrary to what some social media influencers might suggest, there are no easy shortcuts to becoming a millionaire. Building significant wealth typically requires:

• Creating substantial value for others
• Years of focused, disciplined effort
• Delayed gratification
• Willingness to do difficult things that others avoid

It's important to maintain realistic expectations about the time and effort required to achieve financial success. Many young entrepreneurs underestimate the commitment needed, expecting to achieve extraordinary results in a fraction of the time it typically takes.

The Danger of Lifestyle Inflation

As income increases, there's often a temptation to upgrade one's lifestyle proportionally. However, this can be a significant obstacle to building wealth. One entrepreneur shared a cautionary tale about buying an expensive car after his first business success, only to lose a substantial amount when he had to sell it later.

Instead of immediately increasing spending when income rises, consider maintaining a modest lifestyle and redirecting additional funds towards investments or savings.

The Importance of Financial Resilience

Even successful entrepreneurs can face periods of financial hardship. One shared a story of having to borrow money from family to furnish an apartment, despite appearing successful on social media. This underscores the importance of building financial resilience and not judging financial health by outward appearances.

The Problem with Easy Credit

The availability of instant financing options at checkout for various products can be a dangerous temptation. A good rule of thumb is: if you can't afford to pay for something outright in cash, you shouldn't be using debt to buy it. The exceptions to this rule are typically education and property.

While credit cards can offer valuable rewards and points, it's crucial to pay off the balance in full each month. The high interest rates on credit card debt can quickly negate any benefits from rewards programs.

Conclusion

Building wealth is a journey that requires patience, discipline, and a clear understanding of your personal financial goals. By avoiding the hidden habits that keep people broke and adopting proven strategies for financial success, you can work towards a more stable and prosperous financial future.

Remember, true wealth isn't about flashy displays of status or accumulating possessions. It's about creating value, living below your means, investing wisely, and building a life that aligns with your values and long-term goals. By focusing on these principles and consistently applying them over time, you can overcome financial challenges and achieve lasting financial success.

Article created from: https://www.youtube.com/watch?v=ffOkQrYCfOw