6 Middle Class Habits That Will Keep You Broke Forever
Summary
TLDRThis 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
💰 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.
🚗 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.
💼 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.
Mindmap
Keywords
💡Lifestyle Inflation
💡Golden Handcuffs
💡50/30/20 Rule
💡Emergency Fund
💡Financial Automation
💡Tax Loopholes
💡Career Capital
💡Leverage
💡Bad Debt
💡AV Launch Method
💡Investing
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
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