Transcription
Having spent nine years of my life working in Investment Banking and three years studying accounting, I have seen first-hand the middle-class habits that keep people in the rat race. That keeps them tied to a job they don't like to sustain their lifestyle, whilst their greater life goals and ambitions are placed in the background. So, in this video, I'll walk you through what these habits are and how you can avoid them.
Number one: Working for less than your worth. This is one of the biggest mistakes people make. It's common practice for employers to pay their employees less than what they deserve. And so, they will pay their employees the least amount possible, and just enough so they don't quit. How many people do you know whose employers haven't given them a raise at all? Or if they have, is something insulting like three or four percent, which is less than the rate of inflation? So, essentially, despite you having another year of experience, you're getting paid less than you did the year before. And then, when you leave the organization, they try to hire someone else. They realize they need to increase the salary in order to get anyone else to take the job. A middle-class habit is just accepting this the way it is because it's comfortable. You know, you're getting paid X amount on X day, no matter what. But this habit will keep you in a cycle. And finding a new job elsewhere could actually be the best decision you can make when it comes to getting out of the rat race. A more typical pay increase when you move between organizations is 10 to 20%, far higher than the three to four percent you would have got if you stayed in the company. And if you're working hard, and you're putting your soul into something, and you feel like you're getting underpaid, it is okay to leave and go to a competitor. So, network, learn about other industries, go find out what the market is paying for your role, and have that conversation. You may think that moving and starting from scratch is inconvenient, but if you're getting paid 30% more, which you can then put into your investments to give you another source of income, it may well be worth it.
Number two: Buying more than you can afford. When people get their first full-time job, they get a promotion, or a bonus, they tend to upgrade two things. The first is their car. Because even if you don't have the money to buy a full car, you can still afford the lease payments. And of course, this is structured in a way to make you buy a more expensive car than you can afford. And it's also the number one wealth killer. It will keep you working to pay off the loan as long as you let it. What you want to do is either buy a car outright if you have the money for it, or make sure your car finance payment is within the recommended guidelines. The rule of thumb is to spend no more than 15% of your annual income towards your car. So, if your annual income is at $60,000, you should aim to spend no more than $9,000 per year on a car. And that amount should include the car payment, insurance, maintenance, and any other associated expenses. The second thing people will look to upgrade is their home. Because again, banks will lend you four or five times your salary to purchase your house. So, even with a marginal increase in your salary, you can afford a lot more home. But you don't want to buy more home than you can afford. The rule of thumb here, and the general guideline, is that you don't want to be spending more than 28% of your income on your mortgage payments. That's 28% of your gross income, income before tax. If you want to learn more about the different ways you should be managing your money and where you should be allocating it, I have a Money MBA five-day email course. It's completely free, and every day I email you with how you can make the most out of your money. And one of those emails goes over the recommended percentage of where your money should be going. This will be linked in my description if you want to check it out.
Number three: Relying on one source of income. If we have learned anything from the last few years, it is that relying on one source of income is extremely risky. The pandemic caused millions of people to lose their jobs, and we're seeing the same happening again with more and more layoffs being announced. By having one source of income, you are one incident away from not having any incoming cash flow. And a middle-class habit is to just rely on one source of income being their day job. By doing this, you're putting your whole livelihood and financial responsibility in the hands of your employer. And this is a super risky position to be in. So, to break free from the rat race, you need to diversify your income streams. Get a second job, whether it's babysitting, being an Uber driver, starting an online business, or investing in other cash-generating assets like the stock market or real estate. Giving all your financial power to your employer is a slippery slope that you really want to avoid.
Next, we have ignoring the importance of saving for old age. Imagine if you were walking on the streets and you dropped $50 because you had a hole in your purse. And then the same thing happened the next day, and the next day. You wouldn't let that keep happening. You would either fix your purse or you'd get a new one. And the same thing applies when it comes to investing. Yet, very few of us act on it. Even though we are aware that by holding back on investing every day, we're essentially losing out on the ability to let that money compound, we still don't do anything about it. And a lot of that is because of the lack of tools and resources to help you get there, knowing what to invest in, or knowing what's right for you. And as Naval Ravikant states in his book, The Almanac, "You're not going to get rich renting out your time. You must own equity, a piece of a business, to gain your financial freedom." If you don't know where to begin, then two that you can start with are index funds and a target date fund that builds a portfolio based on the retirement year you choose. The sooner you put your money down for retirement, the better off you'll be.
Next up, we have consumption versus production. Money will come into your life, and then it'll leave. This is a relationship that is often looked at in terms of income and expenses. And another way to express this is by looking at it in terms of production and consumption. Money will come into your life because you have produced some sort of value. And for the majority of us, this value will come in the form of labor, a job. Money will leave when you have consumed something. And you house, a car, Netflix subscription. In one way, we can look at the financial position of an individual by determining their relationship between consumption and production. And for a lot of people, that equation is negative. In fact, the average American holds a debt balance of $96,000, and the average personal debt in the UK is over £33,000. The money is leaving quicker than it's coming in. You want to recognize how this is impacting your financial position and both reduce the consumption part of the equation, whilst putting as much money as you can into the production value, the sources where the money is coming into your life.
Next, we have ignoring financial literacy. Financial mastery has a huge impact on our lives, whether we like to admit it or not. We put so much importance on our well-being, our mental well-being, our physical well-being, but so little actually on our financial well-being. When really, this plays an equally important role in our enjoyment in life. It might just be excusable not to invest in our financial literacy in our early 20s. We're busy living life, dating, seeing new places, having expensive items. And because we don't have much money to begin with, the consequences of our lack of financial literacy are actually limited. However, if we carry that mindset through with us to our 30s and to our 40s and don't bother developing our knowledge base of financial literacy, it'll become harder and harder to undo. And this will echo through to the rest of our lives. There are basic things you should understand: understanding tax rules, understanding what your income and expenses are, knowing how to get the most value out of your money. This isn't taught at school, so it's up to us to learn about it. And if you want to know more about any of these topics, then let me know, and I'll make that for you. But just by ignoring this and not wanting to learn about it, you'll stay in a place where you keep working for money.
Number seven: Doing what everyone else is doing. In today's society, we are really under pressure to spend, and we have to do it to fit in. This applies to everyone, whatever your income level is. I have worked with people who are making a lot of money, way into the six figures, but they are still living paycheck to paycheck because they are spending to impress and to look rich and to show everyone how rich they are, instead of actually being rich and building wealth. If you're spending on clothes and bags because you enjoy it and because it brings you happiness, then that's one thing, and I'm all for spending on things that brings you happiness and joy. But spending on it to keep up with what everyone else around you is wearing and to post on your social media to show everyone else what you're wearing, rather than for your own happiness, that's another thing altogether. And this is what keeps the middle class in a never-ending cycle. It is a status-driven society. But you need to find why you're making money and working hard. What do you want to achieve? And how do you want your life to look like? Whether it's to travel business class everywhere, or to quit your job and never see your boss again. As long as it's in line with what your value is, and it's not dictated by anyone else's, that is what will get you out of the rat race. The rat race isn't about working a nine-to-five job. It's about living life on such an edge where you are always chasing the next thing, whether it's a paycheck or a material possession, in a way that your greater life goals and your ambitions are placed in the background in order to keep continuing this race.
Hopefully, this video gave you some ideas or triggered some thoughts into habits that you do not want to go down. Thank you for watching. If you enjoyed this video, you may also enjoy another video that I have on habits that made me six figures by 24, and I'll link that over here. Hope to see you there.