Updated: Jan 23, 2022
Buying a Starbucks latte every morning isn't helping, but there's more to it than that.
We all have big ideas about what we will accomplish in our lives. However, as we gain experience in "the real world," the reality of financial difficulty often sets in. It can feel impossible to get ahead, and slowly your dream of being wealthy might slip away.
There's no shortage of "get rich quick" solutions, with rhetoric so enticing that they seem like legitimate options. While these paths might work for some, in most cases they won't.
There's still some good news, though. In the American economy, it is possible for all people to reach financial freedom and wealth. The thing is, this might take some time and it certainly requires sacrifice. Below, you'll find five things that might be stopping you from building wealth. Once you know the problem, you are that much closer to creating a solution for yourself.
1. No Plan
According to the United States Census Bureau, the average individual income is about $31,133 (2019). If someone worked at that wage for 40 years, and never earned a raise, they would make $1,245,320 across their lifetime (this does not include taxes.)
For fun, let's look at another set of numbers. Let's say you make $100,000 which, as a single person, would put you into the 24th tax bracket. For the sake of simplicity, let's assume you take home 70% of your check, and you never earn a raise. Throughout a 40 year career, you will earn $2,800,000 after taxes.
When you look at your finances over time, it becomes clear that you need a plan. If you aren't careful, you could look back at the end of your career and realize you let a million dollars slip through your fingers.
Budget: A budget is your roadmap to success. There are many resources online that will help you make a budget, but you can create a simple one on paper right now. List your monthly income, and then all of your expenses. Make sure to note if you have any savings and debts. Calculate how much money you are short each month, or if you have any left over. Try signing up for a free budgeting tool like Mint or Every Dollar
Create short and long term goals: Once you make a budget, you will see your true financial situation. Now you can figure out what you want and need to do next. Consider the following:
Do you need to increase income? Try to start a side-gig or do training at work to earn a raise.
Do you need to pay off debt? Start by listing all your debts and then make a plan.
Do you need to make a big purchase? Be specific and detailed. What kind of car are you saving up for? What will that house look like?
Find accountability: Find a like-minded friend or family member, or join an online community. If you want accountability without fail, consider hiring a financial coach to keep you on track.
2. Lack of Education
In school you probably learned about dodgeball and mitochondria, but taxes, investing, and budgeting are often not on the syllabus. The reality is that many adults lack financial literacy. Don't stay in that place. Luckily there are tons of resources online, and you don't have to pay to access them. Beyond helping you build wealth, increasing your financial literacy will relieve stress and worry.
Youtube/Podcasts: As soon as you type a financial topic into the search bar, you'll find thousands of options to choose from. Channels cover a vast variety of topics and financial philosophies. From The Ramsey Show to The Financial Diet, you'll find something that helps you learn.
Books: Borrow a book from your local library or purchase a used copy online. Check out this list of the nine best personal finance books.
Find a teacher: There are online courses available, or you could hire a financial coach to walk you through the learning process.
3. Not Investing
Investing is the key to building large scale wealth over time. According to the National Study of Millionaires, "eight out of 10 . . . millionaires invested in their company’s 401(k) plan, and that simple step was a key to their financial success." On average, these surveyed millionaires said it took them 28 years of working and investing to reach a net worth of one million dollars. There's a variety of ways to invest, from real estate to opening a Roth IRA. If you are ready to invest, and you aren't, you're losing out on thousands, if not millions of dollars over time.
Meet with a financial advisor or planner through your job: If your employer provides a 401k or other retirement plan, they will likely have connections to financial advisors who can walk you through the investment process for free.
Hire a financial advisor: Ask around, or do your research. You want to find someone who will teach you how to invest, so that you can work independently on your portfolio. Check out Ramsey SmartVestor for an easy search.
Find free resources: The information is out there if you are willing to put in the time. Check out a book from your local library or find a reputable source online like investor.gov.
4. Crushed by Debt
It's hard to get ahead when all of your money is going to someone else. Although debt is a very normal part of American finances, that doesn't mean it's always a good thing. Imagine what your life would be like if you didn't owe a dime to anyone. No credit card payment. No car payment. No student loan payment. The level of stress that debt puts on your shoulders can motivate you to get it paid off. At worst, debt is something that can destroy your financial life, sending you to bankruptcy. At best, debt is a nuisance that hinders you from saving and investing to your full potential. Ultimately, debt lengthens your road to wealth.
Determine if you're ready to pay off debt: Before you tackle debt, you want to make sure that you have a starter emergency fund of at least $1000. Additionally, you should be caught up on all of your bills.
Make a plan: List your debts from smallest to largest. Figure out the minimum payment on each one, and calculate how quickly you could pay everything off. Determine little ways to increase your income, whether that's a side job or spending less.
Pay off any debt that you can--today! Once you are ready to pay off debt, make that first payment. When you keep debt around, it's like a weight on your shoulders. Remove that weight by making a payment as soon as you can.
5. Convenience is King
This is actually where Starbucks comes in. Or takeout. Or whatever it is that you just can't get through the day without. Do the math. How much are you spending per day on that thing. Per week? Per year? Ouch.
Now, there's nothing wrong with spending money. Money is there for us to spend (and save, and give). In light of this, it's important to spend it on things that add value to your life, not just convenience.
The coffee example might feel worn out, but the idea of choosing convenience over value is a big one. It has bigger financial implications when that same idea is applied to things like:
luxurious vacations that put you further into debt
taking out large-scale student loans instead of working through school
avoiding putting money into retirement accounts because you want to spend money today on material things
The solution: For simplicity, let's use the example of the daily latte.
Give it up for a week or two: Tell yourself that you are just going to take a break from spending extra money on lattes for a specific length of time. Try one week or a month so that it's not overwhelming. This exercise will give you a chance to see how much you really need it in your life. Maybe making coffee at home or work actually isn't that bad. Maybe ordering the latte is something you enjoy so much that it really brightens your day, which improves your overall happiness. At the end of your little test, you'll be able to determine if you're spending money because it adds value, or if it's simply convenience.
What do to if it's just convenience: Limit your spending. Either replace that spending with another habit (like making coffee at home). Or only allow yourself to spend in that way occasionally.
What do do if it adds value: Make sure to set aside a reasonable amount in your budget for this area. If something adds value to your life experience, it's certainly okay to spend money on it! Now you can feel confident in your decision to spend.
So give it a shot. Where are the areas where you're spending extra money? It's time to make sure that it's actually worth it.
The Bottom Line
Building wealth takes time and effort, but it can be done. Invest some time in your financial life, and you will see it pay off in a big way.
Written by: Norah Kearney