In personal finance, much of the success is attributed to how we behave with our money. And how we behave with money is entirely rooted in our character, personalities, and experiences in life.
If you study your spending habits, you will understand how and why you behave the way you do with your money. You will come to learn that your behavior with money is greatly affected by who you are and what you have experienced in life.
Once you learn who you are and how that affects your behavior with money, you have to understand the barriers that you will come against in your journey of achieving financial success.
In The Art of War, Sun Tzu writes,
“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”
How well you do financially is determined by how well you have positioned yourself against the top barriers of financial success.
Like the Pareto principle suggests, 80% of our problems with money can be attributed to 20% of the causes.
Here are some of the main barriers that you have to come up against in your quest for financial success.
In this article
1. Low Income
High income is the one ticket to financial success that many people do not have. And it’s only getting worse. With advances in technological fields such as AI that will lead to increased automation, the wealth gap is widening. Wealth is getting concentrated to a few wealthy individuals while the bigger portion of the population languishes in poverty.
You can talk about savings all you want but it’s income that builds wealth. It’s very hard to save money when you have a low income. You cannot personal finance your way out of poverty. Often, the enemy is low income and not financial illiteracy.
“the ‘secret’ is the thing in personal finance that no one wants to talk about: it’s easy to save money when you have a high income.
In all seriousness, you can talk about cutting expenses all you want, but it’s income that builds wealth.
This is why the personal finance industry loves the “cut your lattes and get rich” style of advice. They love it because it opens a new door in a world where the other door (high income) is closed for most people.”
2. One source of Active Income
Recently a friend of mine asked me a question that ended up in him signing up for a financial therapy session. He enthusiastically asked, “How can I reduce my sleeping hours so that I can use that time to make more money?”
His way of thinking is right according to his metrics but since using the wrong metrics got him optimizing for the wrong things.
He is right because he wants to increase his wealth by optimizing for the one thing that he exchanges for money. That is time. He is wrong because he is exchanging the wrong thing for money. He is selling his time for money.
“You are not going to get rich by renting out your time. You must own equity- a piece of business- to gain your financial freedom.”
Naval Ravikant
Or maybe as Warren Buffett put it, “If you do not learn how to make money as you sleep, you will work until you die.”
Having passive and multiple income streams is the one thing that everyone should be optimizing for. If you lost your job today, what would you do? What side hustle can you start on the side that you can work on during the weekends to boost your earnings?
3. Low Savings Rate
It’s not how much you make that matters, it’s how much you keep. Many people do not achieve anything financially despite having huge paychecks. This is because all of their earnings go to their never-ending expenses. You can only have a higher saving rate when you desire less.
In the Psychology of Money, Morgan Housel writes,
“Singer Rihanna nearly went bankrupt after overspending and sued her financial advisor.
The advisor replied: ‘was it really necessary to tell her that if you spend the money on things you will end up with the things and not the money?”
Wealth is just the accumulation of the income that remains after you have deducted your expenses. A high savings rate will help you purchase assets that will generate passive income for you. Instead of only focusing on buying possessions and experiences, save some of your income for investing.
4. Bad Debt
Nowadays, debt has become so easily accessible that it is quickly ruining our future financial positions. Or as Dave Ramsey put it,
“we are buying things we don’t need with money we don’t have to impress people we don’t like.”
Companies have realized that we care more about our short-term desires than we do care for our long-term financial success and freedom. Instead of delaying gratification by saving up money to meet the price of our desires, we are falling for instant gratification. We want to satisfy our desires here and now.
Companies have even come up with clever ways to seduce us with debt by telling us that taking up debt and repaying on time will improve our credit score.
What they will never tell you is that by taking debt, you are robbing money from your future self and every shilling you borrow today, is two shillings that you have stolen from your future income.
5. Poor Investment Decisions
The quickest and easiest way to lose money is not by overspending like many people think. It’s by making poor investment decisions. You will hardly spend big chunks of money at a go without questioning your spending habits. An investment that has gone wrong quickly sweeps your account clean.
There are basic rules of thumb that will keep your money safe and reduce your chances of loss in investing.
Never put all your money in one investment no matter how sure you are that it’s going to do well. Never invest in assets or things that you do not understand. Do not invest money that you cannot afford to lose and do not take more risk than you can bear.
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