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5 MONEY HABITS that keep you POOR - Stop Doing This!

If you are not happy with where you are financially and you don't know why, you could have formed unconscious money habits that are detrimental to how you manage your money. Today, I will be covering 5 Money Habits that keep you poor, so you can identify what's not working for you and upgrade your financial game.

Poor Money Habit #1: Not understanding your finances

Can you tell me what your exact after-tax salary is? Or how much did you spent in expenses last month? What are the fixed payments you pay every month?

I'm surprised by the number of people who don't analyze their expenses and who don't have a BUDGET. It's like trying to get abs without working out or eating healthy - you simply can't try to wing your finances and not know where your money is going if you want to achieve any sort of financial freedom.

If you want to learn more about the basics on how to Manage your Money (especially if you have debt or struggling financially), refer to my blog here. The next step is to get intimate with your finances on a regular basis, such as biweekly or monthly basis. I personally like to budget biweekly to check midway if I'm on track. I also like to set a reminder in my calendar so I can update my spending on a spreadsheet and reflect on how I did for the month. Questions to reflect on while you update your budget are: Did you meet your budget? If you didn't, what areas did you go over budget? Part of your money journey is to face REALITY of that student loan you need to pay off or the mounting credit card loans, and to understand exactly where your money is going.

You do not want your expenses to be a surprise. I know of people who have checked their credit card statements for the first time in months and noticed there was a recurring subscriptions that they didn't use, they were being charged higher than what was orginally agreed by that cell plan, or they got charged twice on a purchase, etc. You do not want to be a situation where you are paying something that you didn't even use or purchase.

Poor Money Habit #2: Lifestyle Inflation

As you move up the corporate ladder, you will receive promotions and get paid a higher salary. You might be tempted to buy nicer things and upgrade your current living situation. By all means, making improvements in your life is great but it could also deter you from reaching that next big step in being financially independent.

A common mistake is spending beyond your means or trying to stretch your dollar too thin. For example, if all you could afford was a Toyota before, and now that you have gotten a raise, you can just qualify for a lease on a BMW - you are stretching your dollar too thin since you can just barely afford it every month. Despite getting that pay raise, you can continue to be stuck in a perpetual paycheck to paycheck struggle.

For example, if you are making net $3k a month and your expenses are $2.5k, you are saving $500 per month. If you end up getting a raise that doubles your salary to $6k a month and your expenses have now gone up to $5.5k becase of Lifestyle Inflation (ie. moved to a bigger place, got a nicer car, etc), you are still only saving $500 per month. Imagine how much you can save if you make $6k but kept the same lifestyle with only $2.5k in expenses - you then get to save 3.5k, which is over half of your income.

Lifestyle inflation can also have you priortising all your bills instead of paying yourself first. A common mistake is paying all your bills, and saving whatever is left. This NEVER works out because you will always be chasing your tail instead of getting in front of your finances and actively planning how much you are going to save. That is why budgeting is so important - you have a game plan as to how much you can afford to save, which forces you to pay the bills with what you have. You will be surprised that you can live just fine by working with the spending budget you have. So always pay yourself first, then live within the allocated budget.

It also goes without saying - NEVER go in debt to buy something you cannot afford on your own. Especially, never rack up a credit card balance without being able to pay it in full at the end of each month. Credit cards have the highest interest annual rate of 20%, and the balance also compounds so your debt can grow pretty quickly and get out of control. It also ruins your credit score (which is a pst for a future time). I like to have a peace of mind and have less things than go into debt purchasing material things on a credit card. Let's face it - does the momentary happiness from purchasing something really outweigh the stress and long-term financial consequences of not being able to pay it off immediately?

Poor Money Habit #3: Not Investing

Another money mistake is not growing your money - either by not investing in the market or not investing in yourself. If you find yourself saving some money each month (after having a healthy emergency fund), the best way to grow it is by investing. You are losing money by having it sit in the bank account due to inflation. For example, a good interest rate you can receive on your savings account is probably around 0.1% to 1% and compare that to annual average inflation of 2% - you are losing 1.5% of your money every year by not investing!

People often find investing intimidating, preventing them from making that initial step. However, investing can be as passive or active as you want it to be. Of course, you are not guaranteed to make money every year. However, if you are young, you should be investing long-term anyways and history has shown that the market usually recovers and you make an average positive return. In the case of the S&P 500 (ie. the top 500 stocks in the US stock market), the average 10 year return was around14.80% as of today.

Another investment that pays off in the long run is investing in yourself. If you don't invest in self-development and learning high income skills, you will be stuck at the level or job you are currently at and not be able to have better opportunities that earn higher income. One of Warren Buffett's top tips for beating inflation, he has advocated investing in your own talent as one of the "best ways to maintain your purchasing power over time." Investing in yourself increases your marketability and your value to your employer.

Poor Money Habit #4: Not planning for taxes

One of the biggest expenses you have is going to be taxes. The combined provincial and federal tax rate in BC, Canada ranges from 20.06% all the way to the highest marginal tax rate of 53.50% - which is more than half of what you earn.

As much as you want to sweep it under the rug and leave it to the tax professionals to handle it, it is important to understand the more fundamental benefits out there so you can plan ahead in trying to minimize your taxes. If you just go to the tax preparer right before tax return deadlines, there is only so much they can do since everything is already set in stone and their job is simply to report your income and your eligible deductions at that time.

So educate yourself on the benefits out there specific to your province/state and country. Next time you go to your tax preparer, ask some questions on what you can do to plan ahead. Some of the most common benefits you can take advantage of is contributing to a registered retirement account, like the RRSP in Canada or traditional IRA in the US. Building on top of my previous point on investing, you can invest in these retirement accounts and grow your earnings tax-free while also getting a deduction on your tax return at the same time.

Poor Money Habit #5: Not planning ahead

It can be easy to get stuck in the daily grind of things. You may be living paycheck to paycheck with the general goal to eventually save money, but not make any progress. If this is the case, it is time for you to bite the bullet and set aside time with yourself on what you ultimately want to achieve. Finally get ahead of managing your money (if you want to learn more, read more about it in my blog here).

I would personally set up an emergency fund of 3 to 6 months to cover yourself in case anything happens. The next financial goals are personal to you - whether that is paying off your debt or saving up for an important life event, such as a wedding or a home. Having a clear goal is very important to track your progress against a tangible outcome.

You will also find not planning ahead in life results in unexpected events that usually follow with costly consequences. You cannot control what will happen in the future, but you do have control over what you can do about your finances right now and planning mitigates a lot of the surprises. For example, instead of relying on the assumption you will always have your job, it is safe and smart practice to save up for an emergency fund while you have the security of a job now.

A smaller example would be grocery shopping. People underestimate how much groceries can cost every month as well as how much is wasted. If you simply go grocery shopping without any meal plan in mind, you will often find yourself grabbing bunch of random ingredients and snacks. When it comes to cooking, you might realize you are missing a particular ingredient for a recipe, and then end up ordering Uber Eats instead. You might also end up throwing out food since they expired or went bad. You can avoid all this by simply planning ahead what your meals are for the week. That way, you will only buy the ingredients you need and clean out your fridge before your next grocery trip.


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