I’m going to tell you today why I think most people struggle with money because the large majority of people that struggle with money overestimate how much they need an underestimate how much they spend. I don’t do it anymore, but for a period of time I did a good amount of personal finance coaching and you learn a lot about people when you dive deep, not only to their money situation but into their psyche about money. And it’s so easy to say as I’ve recited before, and as Dave Ramsey says, live on less than you make. That’s common sense. It’s obvious. It’s quite easy to do when you have the right framework in your mind about money, but unfortunately most people are not raised or taught to have a solid mindset around money. That’s why we go into these two ideas of why I think so many people struggle in my book, freelance to freedom.
I talked about it with the idea of your FRUIT. So what does fruit when it comes to your expenses? Every month I have you gather your fruit. F is food or is your residence or your housing, you are your utilities, I or your insurance and your investments and T our transportation and taxes. And when I have people gather that up, they really see right in front of their own face how they overestimate how much they need. And subsequently they underestimate how much they actually spend. It’s actually a really fun exercise to do and I challenge you to do it either by yourself or with your spouse and not having control. This I think is why so many people struggle with money. I can’t tell you how many people I’ve talked to or coached that make $125,000 a year or 140 or 105 and they don’t have any money to show for it.
And they say funny things like, well, we don’t spend on extravagant things. You know, we don’t have real fancy cars or big vacations. I’ll say, well, the average American household incomes around $50,000 maybe a little bit more, you make twice as much as that. Where’s your money? And they have no answer. So how can you make that much money and quote unquote not buy extravagant things and consistently had nothing to show for it. And simply because they don’t track it. Because if you knew what your fruit was, if you knew what all those expenses are, you will know where your money is going and what they find in the first part of it, the overestimating how much they need. The biggest creep that does them in is they start turning wants into needs. Gymnastics for the kids is no longer a want. It’s a need because once it’s in the budget or we can’t pull it out or the travel expenses that come with those activities, all these things that are not necessarily bad things, but we’ve turned them into needs.
And as typical Americans do, as you make more money, you find a way to spend more money. But so many people do it where it doesn’t benefit them. And the one hack we learned was that once we reach our fruit, we start paying attention to spending our money in things that become investments. And what do investments do? They reduce your taxable income. And this is why I try to convince so many people to quit their job and go in and do their business. Because like the episode that I did where I talked about rich dad, poor dad, the rich buy assets and poor buy liabilities. The difference between the people that succeed with money and those that don’t, especially in the lower to upper middle class, is that after the fruit is covered, people doing well with their money, take the rest of that money or a good percentage of it and they put it towards assets and the people that aren’t put it towards liabilities and the ones that put it towards liabilities still see those liabilities as a need.
And when you put it in the need category, your spending consistently creeps up. So we wind up underestimating how much we spend. And they usually fool themselves by thinking, Oh we don’t spend on expensive things, but what they’re spending on is a bunch of liabilities. They’re putting their money generally towards things that are not making them more money. And I’m all for fun and activities and entertainment. But you have to know what percentage of your income goes towards that. And you’d be amazed by how many budding entrepreneurs, freelancers, they want to put the money to invest in their business so they can grow the business and make it more successful so they can either go on and quit their job or just have more time with their family or have less financial stress or eliminate some of the work that they don’t want to do.
So they could take on more work that they do want to do. But I’m astonished how so many people that have these dreams and goals and they know that it’s their future, but there’s no money left to invest in it because all the money’s been spent in other areas that actually creep up their budget but do very little to increase their future success. So they keep on riding this hamster wheel and they keep on making good money or decent money and having nothing to show for it is why I think financial education needs to be so important going forward, not just for adults, but for kids. Because way too many people are struggling when they don’t need to be. And this is a topic, obviously it’s near and dear to my heart, because in all those years in writing the book, we’d never had the biggest income in the world. We just did our best to not overestimate how much we needed and to underestimate how much we were spending. So pay attention and write out your fruit, figure out what money is going towards assets and what money’s going towards liabilities. And if the categories are off, shift them around so you’re spending less on liabilities and more on assets. And with that, I’ll talk to you tomorrow.