6 Middle Class Habits That Will Keep You Broke Forever

Summary

This video script discusses six common middle-class financial habits that hinder wealth accumulation and offers advice on how to avoid them. It covers lifestyle inflation, the importance of an emergency fund, leveraging tax advantages, continuous learning for career capital, the concept of working smart through leverage, and the pitfalls of bad debt. The speaker shares personal anecdotes and financial strategies, like the 50/30/20 rule for budgeting and the avalanche method for debt repayment, to help viewers break free from the financial 'rat race' and build wealth.

Takeaways

• 💸 Middle-class habit number one is lifestyle inflation, which leads to spending more as income increases without building wealth.
• 📊 The 50/30/20 rule is a guideline for budgeting: 50% for needs, 30% for wants, and 20% for savings.
• 💡 To avoid lifestyle inflation, understand your financial situation and adjust the 50/30/20 rule accordingly.
• 🚑 Middle-class habit number two is not having an emergency fund, which is crucial for unexpected expenses and peace of mind.
• 💼 Financial automation is a strategy to save more money by setting up automatic transfers for savings.
• 💼 Middle-class habit number three is not actively reducing taxes through legal loopholes and tax-advantaged accounts.
• 🎓 Middle-class habit number four is not investing in career capital, which includes skills and talents that increase earning potential.
• 🔧 Middle-class habit number five is focusing on hard work without leveraging it to maximize output and income.
• 💳 Avoiding bad debt is crucial; use the AV launch method to pay off high-interest debts first.
• 💼 Leverage, such as code or media, allows for exponential growth and is a key to wealth accumulation.

Q & A

What is the first middle-class habit mentioned in the script that can keep people in the rat race?

The first middle-class habit mentioned is lifestyle inflation, which is the tendency to spend more money as one's income increases, leading to a cycle of debt and preventing wealth building.

What is the 50/30/20 rule and how does it relate to personal finance?

The 50/30/20 rule is a guideline for budgeting where 50% of one's take-home pay goes towards needs, 30% for wants, and 20% for savings. It serves as a starting point to help individuals understand and manage their personal finances.

Why is having an emergency fund considered a crucial middle-class habit to avoid?

An emergency fund is crucial because it serves as a financial safety net for unexpected expenses, reducing stress and preventing reliance on high-interest debt.

What is the recommended time frame for saving in an emergency fund according to the script?

The script recommends saving 3 to 6 months of essential expenses in an emergency fund.

How does financial automation help in saving money?

Financial automation helps by automating savings and bill payments, making it easier to save consistently without having to think about it.

What is the significance of understanding career capital in relation to earning potential?

Career capital refers to the accumulation of skills, talents, and abilities that directly impact one's earning potential. Developing high-demand skills can increase one's value in the job market and lead to higher income.

What is the concept of leverage as it pertains to wealth building?

Leverage is the concept of amplifying one's efforts to achieve greater results, such as through investments, code, or media, which can exponentially increase one's output and wealth over time.

Why is it important to differentiate between good debt and bad debt?

Good debt is used for assets that appreciate in value, while bad debt is for depreciating assets or consumables. Understanding the difference helps in making financially sound decisions and avoiding unnecessary debt.

What is the AV launch method mentioned for paying off debt?

The AV launch method is a debt repayment strategy where one lists all debts by interest rate, makes minimum payments on all, and applies extra funds to the highest interest rate debt first, moving to the next highest once the previous is paid off.

How does the script suggest one can take advantage of leverage through investing?

The script suggests investing in the stock market as a way to use leverage, as it can potentially double one's money every 10 years on average without additional effort, as opposed to keeping money in a non-earning account.

Outlines

00:00

💰 Understanding Middle-Class Financial Habits

The speaker discusses their experience in finance and identifies six habits that keep middle-class people in a financial 'rat race.' The first habit is 'lifestyle inflation,' where people increase spending as their income rises, which hinders wealth building. The speaker suggests the 50/30/20 rule for budgeting: 50% for needs, 30% for wants, and 20% for savings. They also emphasize the importance of an emergency fund for unforeseen expenses, which can reduce stress and financial anxiety.

05:00

🚗 The Importance of an Emergency Fund

The speaker recounts a personal story of a car accident that led to the realization of the necessity of an emergency fund. They explain that this fund is a financial buffer for emergencies, not for discretionary spending. The recommended rule of thumb is to save 3 to 6 months' worth of essential expenses. The speaker also introduces financial automation as a tool to help save money effortlessly by setting up automatic transfers to a savings account.

10:02

💼 Maximizing Career Capital and Reducing Taxes

The speaker highlights the concept of 'Career Capital,' which is the accumulation of skills and abilities that increase earning potential. They stress the importance of continuous learning and skill development to stay competitive in the job market. Additionally, the speaker talks about tax reduction strategies, such as utilizing 401k plans, HSAs, traditional IRAs, and 457b plans, which allow for pre-tax contributions and lower taxable income.

💼 Working Smart with Leverage

The speaker contrasts hard work with 'working smart,' emphasizing the need for leverage to achieve financial success. They define leverage as the ability to amplify one's efforts and results, such as through code or media leverage. The speaker shares personal experiences of learning programming to increase productivity and advocates for investing as a form of leveraging money to grow wealth over time.

💳 Avoiding Bad Debt and the Avalanche Method

The speaker warns against the dangers of bad debt, which is debt incurred for non-essential purchases. They highlight the high interest rates that can accumulate on credit card debt and suggest the Avalanche method for paying off debt, which involves paying off debts starting with the highest interest rate first while making minimum payments on all other debts.

Keywords

💡Lifestyle Inflation

Lifestyle inflation refers to the tendency for individuals to increase their spending as their income rises, often leading to a failure to accumulate wealth. In the video, the speaker illustrates this concept by sharing a personal anecdote of indulging in a luxury item, Ben & Jerry's ice cream, after receiving a higher paycheck. This behavior is cautioned against as it can prevent the establishment of financial stability and wealth accumulation.

💡Golden Handcuffs

Golden handcuffs is a metaphor used to describe the situation where an individual is trapped in a job due to the high cost of their lifestyle, which requires a steady income to maintain. The video mentions this concept to highlight how lifestyle inflation can lead to dependency on a job for financial security, rather than pursuing career satisfaction or entrepreneurial ventures.

💡50/30/20 Rule

The 50/30/20 rule is a budgeting guideline where 50% of one's income is allocated to needs, 30% to wants, and 20% to savings. This rule is mentioned in the video as a starting point for personal finance management, helping individuals to balance their expenses, discretionary spending, and savings effectively.

💡Emergency Fund

An emergency fund is a financial reserve set aside to cover unexpected expenses or emergencies, such as medical bills or car repairs. The video emphasizes the importance of having an emergency fund to avoid financial stress and the need to go into debt during unforeseen circumstances, using the speaker's car accident as an example.

💡Financial Automation

Financial automation involves using technology to automatically manage financial transactions, such as transferring money to savings or paying bills. The video suggests that automation can help individuals save more effectively by reducing the mental effort required to manage finances manually.

💡Tax Loopholes

Tax loopholes are legal strategies that individuals can use to reduce their tax liability. The video discusses how the middle class often overlooks these opportunities, which can be beneficial in managing taxes more efficiently, with examples like contributing to a 401k plan.

💡Career Capital

Career capital refers to the skills, knowledge, and experience that an individual accumulates over time, which can increase their earning potential. The video explains that continuous learning and skill development are crucial for increasing one's career capital and market value.

💡Leverage

Leverage in the context of the video means using various means to amplify one's efforts and achieve greater results, such as through investments, code, or media. It is presented as a key concept for moving beyond linear income and achieving exponential growth in wealth.

💡Bad Debt

Bad debt refers to debt incurred to purchase items that do not generate income or appreciate in value, often leading to a cycle of debt. The video warns against the cultural norm of taking on bad debt for everyday expenses and suggests strategies for managing and eliminating it.

💡AV Launch Method

The AV launch method is a debt repayment strategy where one focuses on paying off debts starting with the one with the highest interest rate while making minimum payments on others. This method is mentioned in the video as an effective way to tackle bad debt.

💡Investing

Investing is the act of allocating resources, such as money, with the expectation of generating an income or profit. The video highlights investing as a form of leverage that can lead to significant wealth accumulation over time, contrasting it with the limited growth of keeping money in a savings account.

Highlights

Lifestyle inflation is a middle-class habit where people spend more as their income increases, which hinders wealth building.

The 50/30/20 rule is a guideline for budgeting: 50% for needs, 30% for wants, and 20% for savings.

Personal finance is personal, and the 50/30/20 rule serves as a baseline to adjust according to individual financial situations.

Having an emergency fund is crucial for financial stability, and it should cover 3 to 6 months of essential expenses.

Financial automation helps save 3.8 times more money by automating savings and reducing manual decisions.

Legal tax loopholes can be used to reduce taxes, and contributing to a 401k plan is one such strategy.

Other tax-advantage accounts include HSA, traditional IRA, and 457b plan, each with its own contribution limits and benefits.

Career capital, the accumulation of skills and abilities, is essential for increasing earning potential.

Investing in skills like learning Python can lead to pay raises and promotions by increasing one's value in the workplace.

Hard work is necessary, but working smart and using leverage can exponentially increase one's impact and income.

Leverage can be achieved through code, media, or investing, which allows for a linear effort to result in exponential outcomes.

Investing in the stock market can double money every 10 years on average, showcasing the power of leveraging time and compound interest.

Bad debt, such as using credit cards for non-essential purchases, can lead to a cycle of high-interest debt.

The AV launch method is recommended for paying off bad debt by focusing on high-interest debts first while making minimum payments on others.

It's important to accept that even with efforts to improve financial habits, there might be moments of feeling inadequate, which is a part of the journey.

There are five financial goals to achieve before turning 30, which are crucial for long-term financial health.

Transcripts

if you ever try to get out of debt or

stop feeling broke chances are you

failed having spent seven years working

in finance I've witness middle class

habits that consistently keep people in

the rat race today I'm sharing from my

personal experience six of those habits

and how you can avoid them middle class

habit number one so I grew up lower

middle class we were never broke but we

were definitely extra careful about what

we bought my mom would always make sure

that we bought things on sale or at the

very least had a coupon handy so you

best believe when I received my very

first big boy paycheck in Corporate

America I was freaking out like I

thought I had made it like Mama we solve

poverty and I remember that the very

first thing that I did was I went to the

supermarket I walked along the aisle and

I grabbed a $6 pint of bed and Jerry's

chocolate therapy ice cream because I

don't know about you but growing up Ben

and& Jerry's was the bis ice cream brand

and then I think I bought it a few more

times that week and that's when I

realized middle class habit number one

which is lifestyle inflation

most middle class people decide to spend

more money as their income goes up maybe

you decide to take out a loan to buy a

new car move into a bigger apartment and

start buying organic free range avocados

the problem is when you start to spend

all the extra money you make you'll

never end up Building Wealth nasam talb

once said the three most harmful

addictions are heroin carbohydrates and

a monthly salary because eventually

you're going to become a prisoner to

your own job your golden handcuffs get

tighter and shinier because you need

your a bi-weekly paycheck to pay off

your debt and to sustain your new

Lifestyle the only way to break free or

to make sure that you never fall for the

golden handcuffs is to know exactly how

much money you should spend and save the

general rule of thumb is the 50320 rule

basically 50% of your take-home pay goes

towards your needs like housing food and

utilities 30% for your wants your

vacations entertainments and Mr magic

lamp and 20% to your savings so if

you're making about $6,000 a month3

would go towards your needs 1,800

towards your ones and 1,200 towards

savings for future Investments but you

need to know that the 50320 rule isn't a

one-size fitall solution it's just a

good starting Baseline to help you

understand your own personal financial

situation and then you can readjust the

ratio accordingly personal finance is

personal for a reason middle class habit

number two so back in 2015 I was doing

an internship in Ohio for the summer and

2 weeks before I was supposed to drive

back to New York I got into a really bad

car accident with four cars my car was

basically towed to the mechanic and they

said that it was going to cost around

$55,000 to fix and immediately I began

to spiral because I had no idea how I

was going to pay for $5,000 but I

absolutely needed to because I had to

drive up in 2 weeks and my sublight was

about to end but I think like 10 minutes

into my panicking I suddenly remembered

that I saved up an emergency fund for

stuff like this and that's when I

realized middle class habit number two

and it's not having an emergency refund

it's basically a cash Reserve that's set

aside for financial emergencies which

does not include a wild Night Out

Vacations or fried chicken Cravings the

money should only be used when all hell

breaks loose when your house gets

flooded when you're stranded in the

middle of nowhere and have no other

options basically when your life is

Fubar now this is really important

because you do not understand how much

your brain is constantly focusing on the

worst case scenario in case you're run

out of cash because you're in some sort

of emergency and you can't pay for it so

by having this buffer it really frees

you up mentally so you have less stress

you have more time to focus on other

things the good news is determining how

much you need in your emergency fund is

simple open up a spreadsheet and take

account of all your monthly expenses

rent loans bills the golden rule for

your emergency fund is to save 3 to 6

months of your essential expenses so if

that's $3,000 for you then you want to

save up to

$188,000 but I understand that saving

this much might seem impossible and

honestly I had a lot of trouble saving

this much too at first so for me I found

that the most effective way to save

money is with this thing called

Financial automation studies showed that

this helps you easily save 3.8 times

more money because everything is on

autopilot and you don't have to think

about it anymore it's the same strategy

that I've been using for years and has

allowed me to finally control my money

instead of it controlling me if

automating your finances sound

interesting to you I'm graning a free

challenge on July 1st while I'll show

you step by step how to automate your

money anyone can join but space is

limited so secure your spot today I'll

leave the link in the description and

again it's completely free and you can

win some great prizes next only two

things in life are guaranteed death and

taxes while everyone has to pay taxes I

realize that more often than not the

middle class are paying taxes without

actively thinking about how they can

legally reduce their taxes there are a

ton of legal tax loopholes that

middleclass people can take advantage of

which is what the wealthy do in fact did

you know that Warren Buffett one of the

richest men in the world with a net

worth of $134 billion actually pays less

taxes than his secretary although it's a

lot easier to reduce your taxes if

you're self-employed it doesn't mean

there aren't things you can do as

someone with a full-time job one of the

easiest ways is by contributing to a

401k plan but you can only have access

to one if your employer offers it but if

you don't then don't worry because I'll

share other ways to lower your taxes in

a bit a 401k plan is basically an

account that you can fill with pre-tax

money which you can then use to invest

in 2024 you can contribute up to $23,000

to a 401k which means that you can

reduce your taxable income by however

much you contribute the three other tax

advantage accounts to check out are

first in HSA it's a savings account

that's used to pay for current and

future medical expenses like doctor

visits or medicine you can contribute up

to and reduce your taxable income by

$4,150 in 2024 there's also a

traditional IRA which is similar to the

401K except you can open one up at any

time time and you can contribute up to

and reduce your taxable income by $7,000

if you're under 50 and $8,000 if you're

over 50 then there's a 457b plan for

government employees nonprofit

organizations and some for profit

companies you can contribute up to and

reduce your taxable income by

$23,000 middle class habit number four

so 2017 was probably one of the happiest

moments of my life because I graduated

college not because I completed a big

milestone as a first generation college

student which deserves claps all around

thank you thank you but because that

meant to me that I didn't have to study

read a book or take any more exams for

the rest of my life because I was

terrible at them but it wasn't until

maybe 7 months into my first job that I

realized that this would severely impact

my earning potential and this is when I

realized middle class habit number four

which is not understanding career

Capital C newort came up with this

concept called Career Capital which is

basically the accumulation of your

skills talents and abilities throughout

your life which directly impacts how

much money you can earn over time the

more you know the more you can do and

the more you can make in economics this

can be explained by the law of supply

and demand basically when you have high

career capital or skills that are in

high demand but there aren't a lot of

people who can do it then you

automatically position yourself to solve

problems that few others can as a result

employers are willing to pay a premium

for you if you want to become rich you

need to develop skills and talents that

others want and if you have have what

skills can you learn that will give you

a leg up from your colleagues like when

I worked in Corporate America I

dedicated 2 hours every week to teach

myself python a programming language so

I could finish my work a lot faster a

task that normally took someone 3 hours

to do I can now do in 10 minutes and the

whole reason for this was so I could

aggressively push for pay raises and

promotions and I don't know if you can

tell but I'm Asian and in Asian culture

you're kind of taught to be quiet keep

your head down and just do the work so

initially it was really hard for me to

ask vate for myself for raises and

promotions but because I had the skills

that clearly made my work stand out for

my colleagues I became a lot more

confident in asking for more money

middle class habit number five so my

parents are immigrants meaning that

growing up they always told me that I

needed to work hard if I ever wanted to

make it and out of my two other siblings

they especially emphasized this to me

because I consistently had the worst

grades in school and I took what they

said to heart I studied and I hustled

really hard to show them that I could do

it but after I graduated college and I

started working in finance that's when I

realized middle class habit number five

which was yes hard work is important if

you grew up poor it'll get you from

point A to point B but to get to Point Z

you need to work smart nval riec con

said one of the biggest separators

between those who make it and those who

just keep on trying is leverage it's

basically a concept that means

amplifying what you do imagine you're

throwing pebbles into a calm body of

water each Pebble you throw represents

your input you your effort into whatever

you're doing and when the rock hits the

water the ripple effect is the output

Leverage is what can transform your

Pebbles into Boulders and basically 10x

the size of your ripples the reason

Leverage is important is because we're

all limited by 24 hours in a day if

you're pizza chef and you can only make

one pineapple pizza an hour no matter

how hard you try to hustle you'll only

be able to make 24 pineapple pizzas in a

24-hour period it's a very linear

process but for the wealthy their

process is exponential they use leverage

so they can make hundreds of pineapple

pizzas in the same 24-hour period two

types of smart work with Leverage is

code leverage and media leverage which

is creating software and creating

content respectively both of these types

of Leverage allow you to scale your

output because all you need to do is

write a piece of code once and the

impact of it can compound over time with

zero marginal cost to reproduce it again

another example is before the internet

if I wanted to teach people about

personal finance I would need to find a

classroom that maybe 30 40 people can

fit inside of and I would need that

classroom every single time a new group

of people want to listen but now with

content leverage all I need is a camera

a computer recorded once and millions of

people like you can watch and listen for

as many times as you want but the

easiest and quickest way that you can

take advantage of Leverage is with

investing on average the stock market

returns about 10% a year meaning your

money will essentially double every

every 10 years without you needing to do

anything if you invest $6,000 a year

from 25 to 65 and an annual return of

10% you'd end up with a total value of

over $2.7 million on the other hand if

you just kept the money under your

mattress you'll end up with the same

amount you tucked away

$240,000 investing versus keeping your

money under the mattress is the

difference between using leverage and

not and if you're looking to start

investing I'll link the investing app

that I use below where you can get free

stuff if you invest at least $100 the

next middle- class habit is being okay

with bad debt nowadays it seems like

taking on bad debt is the cultural norm

people are using bad debt to buy

everyday things like clothes and

groceries which reinforces the mentality

that you can just use your credit card

to buy whatever you like even if you

can't afford it by the end of 2023

Americans had over a trillion dollar in

credit card debt which is the worst that

it's ever been but don't get me wrong I

love using credit cards because of all

the benefits it has but my rule of thumb

is unless I can afford to buy that thing

outright in cash I will not buy it with

bad debt credit card companies want you

to spend more because that's how they

make money if you can't afford to pay

the bill at the end of the month they'll

just charge you interest the problem is

the average credit card interest rate

nowadays is

27.9% which can easily turn your $300

Clothing Haul into thousands of dollars

if you're not able to pay it off in time

but if you already have bad debt the

quickest way to get rid of it is with

the AV launch method here's how it works

first decide how much money you can

budget off to pay off your debt every

month it could be $50 $100 or even

$11,000 second open up Google Sheets and

list out all your balances and the

minimum payments you need to make for

each one third order each debt from

highest to lowest by interest rates so

if you currently have a $1,000 credit

card balance with a 20% interest rate a

$2,800 credit card balance with a 10%

interest rate and a $177,000 car loan

with an 8% interest rate what you want

to do is make all minimum payments on

all your balances to avoid penalties and

if you have any money left over from

what you budgeted put it towards the

balance with the highest interest rate

in this example you would put your

leftover money towards the credit card

balance with that $1,000 number once

that debt is paid off you move on to the

next balance with the next highest

interest rates in the case the $2,800

credit card balance then you just rinse

and repeat which leads me is something

that you've got to start accepting and

it's that even if you're trying your

hardest to be better with money

sometimes you still might feel like

you're not doing enough and that might

be because you don't know the five

financial goals you need to achieve

before you're 30 click here to find out

what they are and what you need to do

before it's too late