According to a Payroll.org survey, 78% of Americans are living paycheck-to-paycheck — a statistic that Ramit Sethi, finance guru and bestselling author of “I Will Teach You To Be Rich,” says is hard to swallow.
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“The median American household is not living paycheck to paycheck. The median American household has a net worth of $193,000,” he said in a recent podcast episode, citing data from the Federal Reserve. The problem, said Sethi, is that people feel like they’re living paycheck to paycheck — a mindset that can be shifted by avoiding four common money mistakes.
Mistake 1: Lying to Yourself
Often, people who say they don’t have enough money or can’t save enough are simply failing to account for how they’re spending. Sethi said he’s talked to six-figure earners who describe themselves as living paycheck-to-paycheck — but don’t count the $23,000/year they contribute to their 401K, or the money they spend on private school for their kids.
“Most people’s feelings about money don’t match how they actually spend it,” he said.
A budget that includes a category for guilt-free spending can not only provide people a necessary financial reality check, but free people up to spend on the things they love, without shame. Overall, he advised four categories of spending, with the following allocation:
- Fixed costs like rent, groceries and utilities (50-60%)
- Investments (10%)
- Savings (5-10%)
- Guilt-free spending (10-35%)
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Mistake 2: Not Having a Financial Moat
Otherwise known as an emergency fund, a financial moat provides enough savings to cover three to six months of fixed costs in the event of an emergency — like job loss or an unplanned medical expense.
“Create a system where your back is never up against the financial wall,” he advised. He recommended starting out small, squirreling away $100/month. Once the three to six month threshold is hit, that money can be redirected to investing or saving.
Mistake 3: Treating Luxury Items as ‘Investments’
It’s not uncommon for consumers to write off luxury expenditures like a new car or fancy face cream as an “investment.” This, said Sethi, is a way to justify extraneous spending.
Unless something can produce a tangible, financial ROI — like stocks, bonds or real estate — it’s not an investment. To know whether it’s truly possible to afford a luxury purchase, Sethi said to work backwards and see whether the item that’s being purchased fits in above budget allocation. For example, someone considering buying a new car should look at their fixed costs, and see how much they have leftover. Is that sum enough to cover insurance, car payments, parking tickets, parking, gas and all the other expenditures that come with owning a new car? If not, then it’s not time to make that purchase.
Mistake 4: Not Being Able To Say ‘No’
Whether it’s a friend that wants to go out for an expensive meal, a kid that wants a new video game console or a pushy salesman, the world is full of ways to unintentionally spend money. The problem, said Sethi, is that people often struggle to say “no.” The result? They feel pressured to spend on things that have little meaning to them, and don’t get to spend on items they enjoy.
“It’s a miserable way to live when all your spending is determined by other people,” said Sethi.
He advised his listeners to create “money dials,” or categories of things they love to spend money on, as well as list out all the things they spend money on that don’t give them joy.
“You can spend extravagantly on the things you love, so long as you cut mercilessly on the things you don’t,” he said.
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This article originally appeared on GOBankingRates.com: 4 Common Money Mistakes Give You Paycheck-to-Paycheck Feeling, Says Ramit Sethi
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