Money Expert Graham Stephan: These 9 Money Habits Are Keeping You Poor
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Peter Burns
7 min read
It’s difficult to build wealth when you’re not sure what you’re doing wrong. Learning good money habits is the best way to figure out which mistakes you’re making that keep you broke.
The first bad habit Stephan warns against is “lifestyle inflation.” This means increasing your spending to match your income. When you start making more money with a better salary or additional stream of income, you increase your level of luxury to match it and essentially remain at the same level of savings.
It’s important to note that spending more once in a while isn’t a terrible idea. For example, getting a raise might mean upgrading your car or wardrobe. However, lifestyle inflation will hamper your ability to save. Once you get used to spending more on things like eating out, it can be difficult to cut back to where you were before your salary increase.
Tracking your expenses is essential for successfully managing your finances. Stephan points out that not everyone does this, and there is a big difference between those who do and those who don’t.
Stephan explains that the average American spends $18,000 a year on non-essential items, including $300 a month on impulsive purchases. When you track your expenses, you’ll be able to see negative trends like this in your expenses. Stephan likens it to an engine light in a car, saying that you can easily notice the signs and fix them much sooner when you’re tracking your spending.
Wealthy people track their spending to spot and fix problematic trends. Stephan says if you try it for two months, you’ll be surprised how much money you start saving.
Borrowing the Maximum
Another mistake that keeps people poor is always borrowing the maximum amount. When you apply for a loan or a line of credit, it is the lender’s job to offer you as much credit as possible. Because of this, Stephan warns that being able to qualify for something doesn’t necessarily make it a good decision. Keep in mind that what you can afford and what you qualify for are two different things.
To determine how much you should take out, come up with a budget that works regardless of how much a bank will lend you. Stephan points out that in the past, he’s purchased homes that cost far less than the amount he qualified for. Proper budgeting allowed him to save more and avoid high monthly payments because he didn’t try to maximize his mortgage.
Not Understanding Taxes
Taxes are inevitable, but wealthy people understand there are ways to improve your situation. To do this, you’ll need an understanding of the tax system and where you can benefit.
Stephan points out that the average single worker in the USA is paying 30.5% of their income to taxes. He offers some ideas on how to use resources at your disposal to save money, such as:
Investing your money into a 401(k) if your employer offers it
Using tax-loss harvesting on your investment losses to save up to $3,000 annually
Running your business through an LLC or S corporation to reduce your self-employment tax
While it may be challenging to learn the ins and outs of the tax system, it could save you a lot. You can also hire a tax professional to learn about some opportunities to save that you didn’t know about.
Ignoring Retirement Accounts
Investing your savings to prepare for a better financial future is an important money habit that wealthy people prioritize. Stephan highlights three retirement accounts that wealthy people use:
Roth IRA: You can contribute up to $6,500 a year or $7,500 if you’re 50 or older. All the profit you make in your RothIRA is tax-free when you turn 59 ½.
Traditional 401(k): You can deposit up to $22,500 per year or $30,000 after you turn 50. With a 401(k), you invest pre-tax money and pay taxes on it when you take it out after you’re 59 ½.
Health Savings Account (HSA): An HSA specifically covers medical expenses. Any profits, contributions and withdrawals are tax-free. To open an HSA, you’ll need to meet specific qualifications, but if you do, you can invest $3,850 for self-coverage or up to $7,750 for family coverage.
Stephan calculates that if you take advantage of all of these retirement accounts, you can invest and save $32,850 a year. That amount of savings will add up quickly.
Not Having More Than One Source of Income
Having more than one source of income will dramatically increase your chances of building wealth. Stephan refers to a report the IRS issued when it studied high-income tax returns. One of the main findings was that consistent high earners tend to have multiple streams of income.
Stephan explains that 65% of millionaires have at least three income streams. To avoid being broke, you should actively work to find more ways to generate income. Some examples of how to add income streams include starting a YouTube channel like Stephan, getting a part-time job or starting an online business.
Being ‘Too Cheap’
There’s a difference between being frugal and cheap. Stephan explains that being too cheap in the wrong places can cost you more. If you hire the cheapest accountant available, you’ll save money in the short term. However, the accountant’s mistakes and inattention to detail might end up costing you a lot more later on.
To further highlight this point, Stephan brings up the boots theory. He says a rich person can afford more expensive boots that may last him a lifetime. A poor person, on the other hand, will go with the cheapest option. This allows the poorer person to save money initially, but they will spend more over time as the cheap boots will need multiple replacements. The point is, if you’re going to spend your money, you should make sure that it’s a good move for your long-term finances.
Not Planning for the Worst
It can be easy to get wrapped up in monthly expenses without looking at the big picture. Difficulties pop up when you least expect them and can devastate your finances if you don’t plan ahead. Stephan points out that you won’t have your current job forever, your car could break down at any moment and a natural disaster could ruin your home unexpectedly.
Having a plan in place can combat unanticipated financial losses. For example, you should save enough of an emergency fund to cover your expenses for three to six months in case you lose your job. You should also purchase the correct types of insurance to protect you, and regularly spend money on maintaining your car so that it’ll run longer and be more effective.
Not Having a Plan at All
Having a plan and knowing your final destination is crucial for building wealth.
Stephan compares having a financial plan to taking a road trip. Before setting out, you need a place you’re heading. Then, you must map out how to get there. A bad money habit that many people have is winging it and hoping things work out.
A financial plan requires you to ask:
What do I need to be doing?
How much do I need to save?
What are my priorities?
Stephan points out that most people don’t need millions in the bank to live the lives they want. They only need to carefully examine their daily life and determine exactly how much that will cost. Once they have a number, they can work backward and break down costs to create a financial plan.
