The more that I write about money, the more I end up talking with people about money. And the more that I talk to people about money, the more I understand that many people believe it is difficult to "get ahead" financially, which is probably a fair sentiment. I'm really too privileged and lucky to comment on such phenomenon one way or the other.
However, I have had enough conversations to realize that a lot of people who espouse such beliefs will ultimately be just fine. It's not that they are financial geniuses or frugalistas or anything like that; they've just taken an adult view towards their money and have begun to make more good decisions than bad decisions which I believe will persist over the course of their remaining five to six decades on this planet.
Given a long enough time horizon and no major upheavals in the structural integrity of the free market system, these people will most likely succeed in getting ahead. They'll continue to grow their careers, they will reign in their spending, they'll pay off their student loans, invest for retirement, switch careers, have babies, lose jobs and get jobs, pay off their house, and over time they will realize, "Hey, we somehow got ahead! Fancy that."
On the other hand, I worry about some of the other people that I talk to. Their mindset is so trapped in the state of broke that they truly think that financial peace, financial independence, and choices are the playground of the one percent. In the Western world, this does not have to be true which is why I am taking the time to outline a few financial fallacies that I worry are keeping my friends broke.
If you've fallen prey to these fallacies you will have to do the hard work to break free because only you can prevent financial insecurity.
Fallacy 1: Your income will grow over time
The median "real" wage in the United states has been stuck around $41K for about 55 years, and I don't see that trending upwards anytime soon. So if you believe that your income is going to rise because that's what happens to income, then you're wrong.
If you want to have more money, you're going to have to figure out a way to earn it, which is no easy task. The best way to grow your income is to either grow a career (which means directing your talents towards developing someone else's business), or by growing your own business.
At first, you might need to stitch together several threads of income: donate plasma, scrap metal, babysit for neighbors, part time job, full time job, etc. Some of these threads might have atrocious hourly rates, and if that's the case, then you can probably drop them unless they somehow fit into a long term game plan wherein each hour that you work is well compensated. When you're first starting to think about growing your income, movement (or experimentation) is crucial. You'll never know what you're worth until you try.
Once you start making money though, the key is to manage that hourly rate with a keen eye towards improving dollars per hour. Of course, you might bump into some hard times where you go back to donating plasma or babysitting or delivering pizzas. The point is not that you'll never have to do low paid work again. Rather, the point is that you will only raise your income if you figure out how to earn more money.
Fallacy 2: You can afford financed things
I've seen several friends who believe that if they can afford their monthly payments, then they can afford whatever it is that they bought. Cars, houses, school, stuff on credit and more. I understand that our society pushes credit on you like crazy, and that the FICO score is the only measure of how good you are with money that most of you know, but if you have to make payments on it, you really can't afford it.
Debt will keep you trapped which is why I advocate avoiding it if humanly possible. How many parents want to stay home with their kids, but are trapped by a load of student debt or credit card debt or car debt? How many people are trapped in too much house, so they don't feel comfortable shifting to a different career? Debt is intoxicating in its promise to give you the life you want, but debt is a lie. Your present life will come at the expense of future options.
You might be able to afford your monthly payments, but you probably won't want to give up those future options which is where debt really ensnares you. The more debt you are in, the more you will think that debt is required to achieve the life you want, and the more you will be trapped by your monthly paycheck going to your monthly bills. Its a vicious treadmill, and one that I recommend stepping off immediately.
Fallacy 3: Career changes require formal education
I get it. We all went to liberal arts schools, or got liberal arts degrees that didn't exactly prepare us for the career of our dreams, but more school is rarely going to be the answer to advancing in your career. Now, if your employer is willing to reimburse you for the degree (without becoming a lifetime indentured servant), I don't think more school is going to hurt you. However, in most cases, now that you've got some experience, a career change requires a better marketed version of yourself (pay someone to rewrite your resume, its way cheaper than school), the chutzpah to start looking for new jobs (even outside of our current market), and maybe a little hustling on the side to learn more.
Lest you think I'm overly critical of school, I think its a fair reminder that my husband is getting his PhD, so I'm not anti formal education. Rather, the circumstances around my husband going to school are that he's getting paid to go (so we aren't requiring debt to finance it), and I am working full time (currently), so we are making strong headway financially. I'm not saying these are the only conditions in which you should go back to school, but if your career is the reason that you're attending school you really need to do math to be sure its going to work out for you. Eighteen year olds get a pass for financing stupid degrees, but 28 year olds do not. I'm serious.
The biggest concern that I have is that many of my friends are going back to school because they are sick of their jobs, not because their aiming towards something better. Really? That's just nuts. Go on a vacation, or sell everything and join the peace corps for a year, or join a traveling circus (here's a blog where you can read all about it). Don't take on an additional $30-$40K in debt for a change in scenery. Or if you have kids (like me), and none of those suggestions sound realistic, maybe you can just trade kids one weekend and take a weekend off for some soul searching, and then go back to your job on Monday with a renewed sense of purpose and vigor.
Fallacy 4: You can keep a good budget in your head
Budgeting cannot happen in your head; I know because I'm really good at mental math, and I can only remember about six things at once. I just paid my electric bill ten minutes ago, and I have no idea how much I spent. If you spend your entire adult life thinking hazily about your spending, how you want to spend, how much you think you're investing, etc. you will be pretty disappointed to find that you are giving less than you thought, spending more than you thought, and investing less than you could.
Even if you're not going to be a zero sum budgeter like me (which is the best kind of budgeter to be), you should at least recap your spending at a regular cadence. It will help you to understand if you have black holes that are sucking your money without any joy. Mental budgets can't keep track of your multiple goals at once, but written budgets can. Do you want more than one thing? I recommend writing down your goals.
If making a spreadsheet is the worst thing that you can imagine then buy You Need a Budget software, or use Personal Capital or Mint or EveryDollar.com (both free and paid versions).
Are these fallacies keeping you broke? Did I miss any? Am I wrong?
I'm a wife, a mom, an employee, and a personal finance nerd who is devoted to spreadsheeting my way through life.