Why People with the Same Income End Up Rich or Broke

two people earn the exact same income let's say $75,000 a year but fast forward a decade or two later and one is financially free yet the other is still stuck in place so why does this happen in this video I'm going to share with you the key differences in habits mindset and decision-making that determine whether someone ends up rich or broke and you will clearly see that even if you have the same income as somebody else how your situation and life can be completely different over time the first thing that we need to understand is

that what you make is only one part of the equation of becoming rich and wealthy sadly it's the one thing in our society that we tend to focus on how much you make or your income is much more cool to brag about and hip to discuss than boring financial habits that actually lead to financial stability and this type of thinking is quite evident according to this 2024 payment study onethird of people earning more than $200,000 a year reported living paycheck to paycheck and 48% of people making over $100,000 per year live paycheck to paycheck as

well so how could that be I mean you would assume someone if they make $200,000 a year that comes out to $112,000 a month after taxes that they would probably be financially successful and stable after all the average income in the United States is somewhere around $75,000 so how is it that 36% of people earning 2.5 to three times the average salary in the United States are in a tough financial situation where they're living paycheck to paycheck it comes down to three common mistakes that lead to being broke even if you're making a decent income

habit number number one is lifestyle inflation the quickest way to sabotage any extra income you make is by ramping up your spend because you just simply can there's a book called The Millionaire Next Door I think it's somewhere back there that I referen here on the channel and it was written in 1996 and what the authors essentially did was study the profiles of the rich they provided critical insights into how the richest 1% in the United States lived and what their habits were and one of the lessons of the book was that most people who

are great accumulators of wealth often keep their lifestyles cheap and modest even when their income increases now for me personally I like making my coffee at home instead of paying let's say $5 for a latte out and partially there is a selfish reason for this I like burnt drip coffee that like that's my favorite style of coffee like the kind that you get from a diner it just kind of tastes like dirty hot water that's particularly what I enjoy but it also turns out to be a win-win because coffee is expensive and I drink it

every day so that's one way that I like to keep my lifestyle modest but for you that could look different maybe you opt out of Spotify Premium and maybe you don't mind listening to the ads that come on Spotify now the book found that on the flip side many people who look well off were actually to be found deeply in debt Physicians and lawyers for example usually earn above average incomes but they also tend to drive luxury cars and live in larger homes because they want to live in the same neighborhoods that their colleagues do

they can then often struggle to pay off student debt and car loans and have huge mortgages my favorite analogy of the book is that the author Likens growing your income as offense whereas having great defense means that you're keeping your spending low one of the famous quotes in the book is the following great offense and poor defense translate into under acccumulation of wealth and quote the foundation stone of wealth accumulation is defense and this defense should be anchored by budgeting and planning essentially what he means is that even with a strong offense AKA a strong

income if you ruin it with poor defense also known as spending you aren't going to accumulate wealth as quickly defense is something that you should always be focused on when it comes to creating wealth habit number two that's a really common mistake here is having too much debt credit cards and Loans make it easy to live beyond your means monthly payments on depreciating assets like cars will chip away at your future wealth as well now imagine you have two friends let's call them Graham and Humphrey and they both earn $75,000 per year Graham unfortunately he's

got $5,000 in credit card debt with an interest rate of 20% to pay it off within a year he needs to allocate about $500 per month toward the debt including interest and this leaves Graham with significantly less disposable income for saving investing and other expenses Humphrey on the other hand my guy he has no debt and can put the same $500 per month into the S&P 500 earning 8% per year in just one single year Humphrey has saved $6,000 and it's starting to grow even further due to compound interest now in just that single year

alone where gram had credit card debt and Humphrey didn't Humphrey $6,000 could eventually turn into over $60,000 in about 30 years so you can see that the longer that you stretch out the time Horizon the higher impact debt will actually have on your overall net worth in the long run you could easily see how if you and your friend both earn $75,000 per year but one has $55,000 in credit card debt versus one person doesn't have any debt at all what the effects are one of the Milestones you should be aiming for at all stages

of your life is to have zero dollar in debt besides perhaps a mortgage and my personal opinion is that you should have your cars paid off as well I think carrying a loan on a depreciating asset is one way in which your money will never work for you the third common mistake I see here is the lack of tracking budgeting and planning when it comes to your money it's so easy to spend Friv ly without knowing the full repercussions of how much you're spending if you're not tracking it in my early 20s I would go

buy a sandwich down at the deli even though the company that I work for provided lunch I personally thought oh I want some variety here but as a result I think I tallied it up one month and I had spent over $150 on just eating sandwiches out when I could have easily saved that money and just ate the food that the company provided so when I first started tracking my expenses almost 11 years ago now I had literally zero idea how much money I was spending on every category of my life and it turns out

that humans are horrible estimators of how much they actually spend this is especially true if you start paying for things with a credit card or a debit card so in an MIT study using fmri Imaging scientists examined the brain activities of subjects when they spent money with credit cards versus cash the crazy thing is that researchers found that the credit card purchases activated a part of the brain called the striatum I think I said that right it's a brain region associated with reward regardless of price cash purchases on the other hand they only triggered a

very weak weak signal for the reward activation when that happened the study suggests that credit cards facilitate overspending through two mechanisms number one the reduced pain of payment because spending is now decoupled from immediate repercussions like you don't see the cash physically leaving you the pain of payment is actually quite small and number two there is some reward part of the brain that is actually activated when swiped leading to a cycle where you might actually want to spend more money when it came to cash there was a weaker link for that reward activation and there

is more of a pain of paying when you're physically handing your cash over and I will link this study down below my point here is that it's scientifically backed that if you are swiping your card or using cashless payments that you are probably more likely to spend money and when it comes to the amount that we spend we are horrible at estimating how much we've spent or we haven't spent if you have a clear understanding of where your money is going you won't be as likely to overspend over time this intentionality can lead to more

investing savings and just overall a healthier Financial picture on the other hand somebody that doesn't know where their money is going could overspend on items neglect their savings and this could ultimately lead them to living paycheck to paycheck so it really goes to show you it's not how much you actually earn but how you actually manage that money and how much you save what I personally do is track my expenses on a daily basis through an app or you can write it down and then at the end of every month I just summarize it on

my personal Google sheet if you would like my free tracking template that I use on a monthly basis to track down my expenses and net worth I will link it down below it's completely free to get it and I want you guys to have a better Financial life this year so make sure you grab that down below so those are three common mistakes that people who are broke tend to exhibit but now let's talk about the three habits that lead to wealth and you really want to pay attention to this section if you want to

get wealthy the first is investing early so let's pretend Graham and Humphrey again we're back with the same example they have the same income of $75,000 per year Humphrey starts saving and investing at the age of 20 and invests $2,400 per year for 10 years from the ages of 20 to 30 years old Graham on the other hand man he goes and party in his 20s he binges all you can eat sushi and he has enough iced coffees to the point where he's living paycheck to paycheck in his 20s but then Graham turns 30 and

he realizes man I got to get my life together so he starts to save and invest $2,400 a year for the next 35 years so who makes more money by the age of 65 Humphrey only saved for 10 years from the ages of 20 to 30 but Graham saved from the ages of 30 to 65 well the results will shock you as you can see here Humphrey contributed only $24,000 total versus Graham contributed $84,000 over the course of his life but yet because of the 10-year Head Start it was Humphrey who still had the higher

ending balance That's The Power of compounding when it comes to time great accumulators of wealth know this and this is an example of how even if you have the same income as somebody else how you could end up with way more money than them in the long run imagine Graham just never invested at all in his life by the time he was 65 he would have nothing to show for it while Humphrey would have over 630,000 all from an initial contribution of $24,000 in his 20s habit number two that leads to wealth is to pay

yourself first so the biggest trap is that for many people money will enter their lives they think they can spend all of that money and then after they spend it all they have nothing to show for it an example of this might be somebody with a checking account balance that always reverts back to the same number every two weeks say somebody keeps $2,500 in their checking accounts and they get paid $1,500 for their paycheck at the end of 2 weeks you check in on them and guess what their checking account balance is at $2,500 again

so instead whenever you get paid the first thing that you should do is to just set aside a certain percentage of that paycheck for your future self perhaps you get paid $1,500 every 2 weeks and you set aside $250 first that way you know for certain that at least you have $250 per paycheck that you are going to save and invest for later I know that this is a very tiny habit but like everything with personal finance tiny habits will lead to incredible results over time habit number three of somebody who ends up rich is

that they f focus on assets and not liabilities wealthy people prioritize spending money on things that make them money or generate more value than they put into it over time for example stocks real estate or starting a business these are assets that can all provide cash flow dividend stocks can pay regular payments just for you owning them or a rental property could produce rental income this type of cash flow can then be reinvested or used to cover your expenses to grow your overall wealth liabilities on the other hand drain money from your wallet so think

about making a car payment a car is a typically depreciated asset which means that it loses value over time in addition if you have a car loan you're paying interest on the car loan itself that means you are literally paying principal and interest in order to pay off a car that is literally going down in value over time it sounds like a really bad deal to me so you could easily see how if two people had the same income if one person focuses more on cars luxury goods or other items that depreciate they could end

up with a lot less in net worth and someone who saves their money and buys an asset that appreciates over time okay so we've covered a lot of the habits that result in financial consequences down the line but one thing that should be talked about more is the psychology around money because the truth is personal finance and psychology go hand inand one of the ways that psychology manifests itself in our beliefs about money comes from our mindset so let's compare two people again with the same income however let's say one person has a scarcity mindset

and the other has an abundance mindset about money the person with a scarcity mindset might have a constant worry about money feeling anxious about running out of it even when there is enough when approached about investing their money their instincts will tell them to hold on to the money they do have and not risk it by investing because taking on a risk is a Surefire way for them to lose it so instead they sit on their cash keeping it under a mattress even though their logic is slightly irrational and a lot of you watching right

now might feel this way especially if you have immigrant parents so in my life personally my dad came to America without any money and he's maintained a scarcity mindset around money his entire life but I don't blame him for it I mean he grew up during a period of war and occupation and it became ingrained in him that he should hoard the resources he did have because he had already lost it once before this eventually translated into him not taking as many calculated risks as he probably could have and it currently stops him from enjoying

his life even though he's well into his older years and probably has enough money to live out his life in addition I didn't know this at the time but that type of mindset was passed down silently to me and it's something that I've been personally trying to work on my entire life in order to shift to a more abundant mindset around money now sometimes with this mindset the opposite can also occur people may feel so stressed that they often spend their money on short-term immediate gratification in order to manage that stress so they might actually

eat out more often than not and buy unnecessary items now in the fear that they're not going to have any money in the future so both of these are flaws in this mindset but now let's actually compare the scarcity mindset to someone who's more abundant someone with an abundance mindset firmly believes that there is enough money to go around now and that in the future more money can always be made as a result they invest their money now not for the fear of it going down but because they see money as a tool to grow

their wealth and build a better future instead of dwelling on limitations they might use their money as a tool to invest in themselves perhaps they learn new skills or they pursue side projects this could look like somebody investing let's say $3,000 or $5,000 into one of those live events that they attend to better themselves and that could be viewed as a waste of money to other people however to that person investing that amount of money with an abundant mindset they know that there's going to be some Roi on their investment these people are more likely

to save for their long longterm goals recognizing that if they sacrifice some of their short-term gratification today it will lead to compounding wealth later on this success builds confidence further reinforcing the belief and the potential for growth and then it becomes a virtuous cycle I think this difference is just another way that two people with the same income could either end up rich or broke okay so if you're watching this video and you want to end up like the rich person and not the broke one let's consider the following practical First Steps that you can

take number one make a plan always start with a budget just like if you were an architect trying to build a bridge you can't accidentally just stumble into building an amazing suspension bridge you need a plan or a blueprint to build that bridge and the same goes for your finances once you have some sort of plan or budget written down you can start allocating money where it needs to go and having a plan is basically the first step in doing all of this the second step is to not have any Consumer Debt so if you

do have it considering paying this off first and foremost when you don't have payments on debt you're going to have more money to work with that you can actually use to save and invest and that brings me to step number three rich people actually save and invest they make a plan for it and they do it purposely it's no accident that they become rich they guarantee and they make sure that they actually invest so that their money can start to work for them and lastly step number four my favorite step of the day is to

live on less than you make you should understand by now that one of the biggest ways to erode your wealth is to give into lifestyle inflation every rich person knows that they need to live on way less than they make in order to invest and save the difference I've said this already today but it's really not about how much you earn it's about what you do with it that matters and it's also the mindset that you have to have around money in order to be successful ultimately I believe that mastering personal finance is more about

mastering yourself rather than doing crazy math calculations or forecasts or optimizations with your credit card points even though that can be fun sometimes I think that the more that we understand our own habits psychology and behavior the more control that we have over our own destiny if you enjoyed this video make sure to let me know in the comments and check out my next video right here about how why you aren't actually behind in life and why every one seems to have more money than you but it actually might not be true make sure to

follow me on Twitter and Instagram I post there almost daily and I will see you guys in the next video thank you for being here peace [Music]