We all dream of achieving financial freedom someday. Of course, you need money to achieve it. But we ignore the importance of having the right mindset. Because without it, you will end up spending all your income with little to save in the end. The modern world is full of traps to extort money from you. If you are not careful, you might never reach your dream. In this article, I will discuss 10 such traps that might have been keeping you poor. I will also explore ideas on how to avoid them. So, let’s get started.
Trap #1: Trying to look rich
The fastest way of becoming poor is to try to look rich. In today’s age of social media, we often indulge in irresponsible spending just to look rich and impress others.
If you have created enough wealth to live a lavish life, you can spend it as per your wish, and that is absolutely fine. But on the flip side, if you don’t have enough wealth to afford expensive items every now and then, it is wise to avoid them. Don’t borrow money to fulfill your wants and desires. The race of looking cool and showing off on social media will make you financially blind. You are bound to make bad decisions that will take you absolutely nowhere.
- Avoid taking debt to fulfill your wants and desires
- Avoid purchasing on EMIs
- Stay away from Buy Now Pay Later (BNPL) services
- Know the difference between your needs and wants
- Prioritise Saving and Investing
The key thing is having the right mindset. Don’t try to appear reach. You will never be financially free that way. Instead, focus on being rich from within by saving, investing, and generating multiple income streams.
Trap #2: Investing in purely safe instruments
If you look at our previous generation, mostly they used to invest in safe instruments like debt, fixed deposits, bonds, etc. It used to work earlier because the inflation was low. One could easily beat inflation by safe small returns.
However, the scenario has changed now. Post-2008 recession, governments across the world have printed a lot of money. If you look at the recent Covid period alone, the US government has printed over $5 trillion USD. This gives rise to inflation.
The average inflation rate in India is about 6-7%, in the US it is similar. So, you need a 7% return on your money just to preserve the value of your money. To grow your money over time, you will need returns higher than that, around 10-12%.
This imperatively implies we have to take some risk and invest in equity instruments like stocks, and mutual funds. With proper knowledge, discipline, and strategy, equity investment can help you grow your wealth over time.
Trap #3: Prioritizing degree over skills
When you focus too much only on getting degrees after degrees, that is not always the most productive utilization of your time. Of course, it depends on your personal aspiration. If you want to pursue an academic career or research, it makes sense to get two Ph.D. degrees or spend years preparing for competitive exams.
But for the majority of cases, dedicating your time exclusively to exam prep and not doing anything alongside it, might not be the best utilization of your time.
Right now, the world is shifting towards a skill-based economy. A College/University degree is not a big enough differentiating factor anymore. With so much competition everywhere, companies focus more on what skill set you have compared to what degree you hold. So, it makes more sense to seek out practical learning opportunities, and live projects, learn new skills, and familiarize yourself with the latest technology developments in your domain.
Like money, skills also compound over time. So the sooner you start the better. Having the right skillset will give you a significant edge over others.
Trap #4: Undertaking bad debts
It is extremely important to understand the difference between good debt and bad debt. While it is somewhat true that you should avoid all sorts of debt, it is not always practical. As you try to grow in your career or start something of your own you will have to undertake some sort of debt.
When you plan to start a new business, increase your skillset, or get a good college education, there is no harm in undertaking debt. For example, if you do an MBA from a good business school that will improve your earning potential. You will be able to make more money after your studies. If you undertake a debt for such things, that is absolutely fine. It is a good debt.
The same goes for business. If you need to take a debt to start or grow your business, it is completely fine to do so. Because it will improve your earning potential in the long run.
However, if you take debts for unproductive things like purchasing an iPhone or an expensive car, that becomes a bad debt. Nowadays it is getting easier and easier to get a debt in the form of easy EMIs, BNPL, credit cards, etc. You should avoid getting into such debts.
Trap #5: Not being very proactive early in your career
In the early stages of your career, you are young, high on energy, and have less commitment. Maximizing your earning potential is the best thing you can do during the early days. You should utilize your 20s in developing your skillset, exploring different opportunities, learning about investing, starting something of your own, and maximizing your earning potential. I am not telling you to give up everything and work all day. The point here is that you should not look for a very comfortable life with a good work-life balance very early in your career. Nothing can be achieved without making certain sacrifices. If you can utilize your 20s to its full potential, you are bound to find financial success a lot earlier than most others.
Anything worth achieving is only done through sacrifices. There is no shortcut.
Trap #6: Not managing your money properly
We all work so hard throughout the month to get our salary. But as soon as we get the paycheck, we spend like there is no tomorrow. No wonder we end up with an empty wallet by the time the month ends. We spend hours doing hard work to earn the money, but we don’t spend any time preparing a budget to manage our money. As a result, you end up spending on unnecessary things and no saving.
So if you want a better future where you will have financial freedom, start managing your money today. Spend some time creating a monthly budget, reviewing your spending habits, cutting down on things you don’t need, paying off your debts, set aside some money for saving and investment. If you are interested, you can go through my articles on how to create a practical budget and best strategy to pay off your debt to get started. You will soon be surprised to see how much your life has improved.
Trap #7: Expensive ‘normal’ behavior
When it comes to spending, it varies from person to person what his/her normal behavior is. For example, I prepare my lunch at home every day and take it to work. That costs me around $15 a week. Whereas, my colleague eats out or orders through Uber Eats every day for similar lunch. He spends around $100 a week for the same lunch. It has become a norm, which means it does not give him any special enjoyment while he gets lunch. So, where my normal behavior costs me $15 a week, his normal behavior costs him $100 a week. This is true for not just food but every other behavior.
Such normal ‘expensive’ behavior can cost you a lot of money in the long run. This will reduce your ability to save and invest. So, analyze your habits, do a cost-benefit analysis, and find out if it is really worth it.
Trap #8: Living in an expensive location
Your cost of living will largely depend on the place you live in. Rent, for example, will vary significantly from place to place. If you live in a city like New York, it will cost a lot more to rent an apartment than if you stay on the outskirts of the city. I know it is difficult to move from place to place. But an expensive city will have a significantly higher cost of living. If your income is not high enough, you will end up spending most of your income just to support your cost of living.
So, if it is possible, move to a place where the cost of living is less. Chances are, you will get a much better apartment at a much cheaper cost if you go to the outskirts of the city.
Trap #9: Expensive ways of enjoyment
When it comes to enjoyment or fun activities, everyone has their own interpretation. Some enjoy being outside, going hiking, cycling, or playing outdoor sports. Then others find enjoyment in going to expensive pubs, staying in luxurious resorts, excessive shopping, and other such activities that cost a lot more money.
We all find enjoyment in different ways. While some come for free, others eat up your money very quickly and you end up with no real savings at the end of the month.
How to avoid falling into this trap? Take a look at your sending habits, and see how you spend your weekends and holidays. Look for activities that you enjoy doing and do not require a lot of money. You don’t need to spend a lot of money to find enjoyment. Don’t fall for all the marketing and advertisements. Just get outside a little more and be more creative. You will find a lot of interesting hobbies and interests.4
Trap #10: Consuming too much social media
social media is not necessarily bad when used responsively. But, we often spend hours and hours scrolling through Facebook feeds and Instagram reels. At the end of the day, social media wants to sell you something. Social media influencers keep pushing you to buy a new product with some discount or coupon codes. People easily get influenced by the lifestyle of others in their social network circle. They often engage in a mad race of looking cool and rich on social media. In the end, you end up buying a lot of unnecessary things, and you will fall short of money for more important things.
You don’t need to quit social media but learn how to self-control. Too much of anything is bad. Check your phone’s app usage to find out how much time you are spending on social media. Try to restrict it and avoid spending more than 30 mins to 1 hour per day on social media. Stick to the real world more.
Hope you found something useful today. Let me know your thoughts in comments.
