10 Financial Habits That Keep You in Poverty

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A recent study from LendingClub found that 60% of Americans, including more than 40% of those who would be considered high income, say they live paycheck-to-paycheck.

Granted, living in the U.S. is not cheap. It costs a median of roughly $53,000 for an individual to live reasonably comfortably in the U.S., according to recent statistics from GOBankingRates. That number rises to more than $112,000 in Hawaii. There are only 15 states where the living wage is less than $50,000, and five where it’s more than $70,000.

Read: What To Do if You Owe Back Taxes to the IRS

Break the Cycle With These Expert Tips

No matter how much – or how little – you make, you might be destined to poverty-level living if you make these 10 money mistakes. Fortunately, they are all too common, and they help explain why so many Americans live paycheck-to-paycheck.

Let’s look at the 10 pitfalls, along with some expert tips on how to avoid them from the likes of Dave Ramsey, Jaspreet Singh and Warren Buffett.  

1. Failing to Budget

Ask almost any finance expert and they will tell you that failing to budget is one way to ensure that you’ll struggle financially. Dave Ramsey, in a column for Knox News, wrote, “Live by a budget, and you won’t fail.”

He recommends a “zero-based budget,” where every dollar has a purpose. This makes it less likely that you’ll toss away a fiver on a fancy coffee or even go over budget on groceries.

Zero-based budgeting, Ramsey emphasized in another post on Ramseysolutions.com, doesn’t mean you spend all your money by the end of the month. You should leave a financial buffer for unexpected expenses and keep the rollover in your account or transfer it into a savings account or investment fund.

2. Consistently Spending More Than You Make

Even if you have a budget, you must make sure it’s balanced. If your expenses consistently exceed your income, even without unplanned expenses or impulse spending, you need to make some changes. Review your budget to see places where you can cut back, or consider a side gig to earn $1,000 a month or more.

3. Impulse Buying

If you create and stick with a budget, you’re more likely to avoid the second financial pitfall: Impulse buying. However, temptation lurks around every corner at the local Costco or Target, in grocery stores, and even online.

To avoid impulse buys, make a list before you go out and make a commitment to stick to the list. Reward yourself with a treat like a stop at the local coffee house (in your budget, of course!) if you kept your commitment.

If late-night, online shopping is an issue, don’t save your credit card information in your shopping apps. Not only could this help curtail fraud, but it will make you think twice about that purchase.

4. Ignoring Credit Card Debt

Credit card debt can accrue rapidly. If you’re consistently falling behind on your bills, is runaway debt the reason? If you take a look at your credit card statement, you’ll see how many years – or even decades – it will take you to pay off your credit card bills if you make only the monthly payment. And, even more frightening, you’ll see how much you actually pay over that time in interest.

If you find yourself making only the minimum payments and failing to get ahead, consider debt consolidation as a solution. You can transfer balances to a lower interest credit card, or consider taking out a personal loan. There’s one caveat: Make sure not to charge anything on your cards once you’ve consolidated the balances.  

5. Not Understanding the Value (or Danger) of Compound Interest

Compound interest can be cause for celebration — or despair — depending on whether you are earning it or paying it. When you understand how compound interest works to help money accrue faster, you’ll be incentivized to avoid high-interest loans and credit card debt and shuttle more money in your savings accounts.

When money compounds, interest is paid or collected on not just the initial principal, but on the interest earned. Through the power of compounding interest, if you put $1,000 in a savings account with 6% interest compounded daily, you’d have more than triple your money — about $3,319.79 — in 20 years.  

6. Not Setting Up Automatic Savings

Once you recognize the power of compounding interest, you’ll want to make it work for you. One way to do this is by automating your savings account. Finance expert Jaspreet Singh advised that everyone has three bank accounts: one for spending, one for saving and one for investing. As reported by GOBankingRates, he recommended putting 10% in your savings account for emergencies, 15% set aside for cash investments and living off the remaining 75%.

7. Not Having an Emergency Savings Account

If you don’t do as Singh suggested, any sort of emergency – from unexpected medical bills to home repairs – can derail your financial efforts and possibly even thrust you into poverty. Start with saving 10% of your income as an initial goal. Aim to have three to 12 months of living expenses set aside, Singh said, depending on your lifestyle.

8. Not Investing

There’s a difference between saving and investing. Saving for emergencies is important. But whether you choose stocks, bonds, mutual funds, ETFs or real estate, it’s also important to put some money aside where it will grow potentially faster than the rate of inflation.

If you are not investing your money, Singh has said, you are working to make someone else rich. In an interview with GOBankingRates, he said, “Make yourself rich first by using your money to buy investments.”

9. Putting “Things” Over Financial Security

In the same interview, Singh explained, “When you go out and wear Lululemon pants with your Gucci belt and Apple AirPods — you look rich, but the people who are actually getting rich are Lululemon, Gucci, and Apple (not to mention their shareholders, too).”

Likewise, Warren Buffett, the fifth wealthiest man in the world according to Bloomberg Billionaires Index, pointed out that his $1.4 million home, which he purchased for just $31,600 in 1956, according to GOBankingRates, would have made him more money if he had rented it out and used the money to purchase stocks.

Of course, everyone needs a place to live. But it makes you think twice about spending when even billionaires eschew luxury goods.

10. Not Investing in Yourself

There’s one thing the money moguls we researched all have in common: they all work on personal development and lifelong learning. True financial security comes from knowing you have the skill, savvy and tenacity to bounce back from any situation.

“The best thing you can do is to be exceptionally good at something,” Buffett said at a shareholders’ meeting reported by Inc.com. “Whatever abilities you have can’t be taken away from you. They can’t actually be inflated away from you. … So, the best investment by far is anything that develops yourself, and it’s not taxed at all.”

In another interview, he advised, “Investing in yourself is the best thing you can do.”

Final Take

Once we realize that the right money mindset can keep us broke or catapult us to wealth, it’s easier to avoid the pitfalls and create the habits that lead to financial security.  

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