A recent Payroll.org survey revealed that 78% of Americans feel they are living paycheck-to-paycheck. However, finance expert and I Will Teach You To Be Rich author Ramit Sethi challenges this narrative. Drawing on Federal Reserve data, Sethi explained that the median American household has a net worth of $193,000, suggesting that many people perceive themselves as struggling financially due to common money mistakes.
Sethi outlined four key errors that, if avoided, could help reshape financial mindsets and habits.
Mistake 1: Lying to Yourself
Sethi argues that many people’s perceptions of their financial situation don’t align with their actual spending habits. He cited examples of six-figure earners who feel financially strained but overlook significant savings, such as 401(k) contributions or private school expenses.
To address this disconnect, Sethi recommends creating a budget that includes a category for “guilt-free spending,” allowing people to enjoy their money without shame. His suggested budget allocation is:
- Fixed costs (rent, groceries, utilities): 50-60%
- Investments: 10%
- Savings: 5-10%
- Guilt-free spending: 10-35%
Mistake 2: Not Having a Financial Moat
A financial moat, or emergency fund, is essential for covering three to six months of fixed expenses in case of unforeseen events like job loss or medical emergencies.
“Create a system where your back is never up against the financial wall,” Sethi advised, suggesting individuals start by saving $100 per month until they reach their goal. Afterward, those funds can be redirected to investments or other savings.
Mistake 3: Treating Luxury Items as ‘Investments’
Sethi cautions against labeling luxury purchases like a new car or high-end skincare products as “investments.” Unless an item produces a tangible financial return—such as stocks, bonds, or real estate—it is not an investment.
To evaluate affordability, he suggests checking whether a luxury purchase fits within your budget allocation. For instance, when buying a car, consider all associated costs, including insurance, gas, parking, and maintenance. If these expenses exceed your available budget, it’s not the right time to buy.
Mistake 4: Not Being Able to Say ‘No’
Many people struggle to decline financial requests, whether it’s a friend suggesting an expensive outing or a child asking for a new gadget. This inability to say “no” can lead to spending on things that bring little joy or value.
“It’s a miserable way to live when all your spending is determined by other people,” Sethi said.
To counter this, Sethi encourages people to identify their “money dials”—categories they love spending on—and cut back on things that don’t bring them happiness. His philosophy: “You can spend extravagantly on the things you love, so long as you cut mercilessly on the things you don’t.”
The Bottom Line
By addressing these common financial mistakes, individuals can break free from the paycheck-to-paycheck mindset. Building a realistic budget, creating a financial safety net, and learning to prioritize spending on meaningful items can lead to a healthier financial outlook and greater overall satisfaction.
