September 28, 2022

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Which financial mistakes will keep people poor?

Adam Fayed

Founder of Global Online Financial Advisory Firm 

The biggest ones are:

  1. Spending more as you earn more (lifestyle inflation). People can’t live like they are students forever. Yet countless people do just increase how much they spend as they earn more. This is one of the biggest reasons why even some very high-income people are broke. Studies have shown as many as 20% of high-income people are broke (living paycheque to paycheque), and more in the upper-middle and middle. This is a major reason for that. There are two reasons why people tend to do this – bad habits have formed, or they are trying to “act rich” and show the world they have made it. Instagram probably wouldn’t exist if there weren’t so many people looking to show off!
  2. Getting into credit card debt. Not all debt is bad all of the time. Almost every successful business has used it. Yet credit card and consumer debt is very dangerous
  3. Spending loads of money on depreciating assets, like most cars, and not on assets that appreciate:

4. Not taking risks seriously. Things happen in life. Yet many people will still put close to 100% of their eggs in one basket like a company, a home, or just one stock.

5. Not being liquid enough. If all your assets are in a home or business, it is riskier than if you have assets in the stock markets through ETFs or other vehicles.

6. Spending too much time with toxic people and not enough time with more positive people

7. Not engaging in lifelong learning.

8. Saving rather than investing. This is especially risky in countries where the exchange rate and inflation risks are huge. Plenty of people have been wiped out by this in the past.

Ultimately, wealth and income aren’t the same. Cashflow is also kind, as is potential liquidity for a portion of your assets in an emergency.

Therefore, if somebody is worth $5m on paper, but it is all tied up in illiquid assets, that isn’t the same as having $5m in a liquid ETF portfolio.

Likewise, if somebody is making $500,000 a year but is spending $500,000 each year, that isn’t the same thing as earning $70,000 and spending $50,000.

In fact, it makes that person poor in many ways, even though general society would think they are rich as they are earning 500k.

Yet in reality, they are just living paycheque to paycheque. Any unexpected event, like ill health, could put them on the breadline.

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