3 Financial Habits Comparison: Poor Vs Middle Class Vs Wealthy
What do you ask yourself when you are looking at a product? How do your financial habits compare to the three financial habits of the poor, middle class, and the wealthy?
The poor, middle class, and wealthy ask different questions when managing their money. These fundamental questions inform their financial habits.
You can practice negative and positive financial habits. Bad habits keep you from moving up the economic ladder, while good habits can increase your chances of financial success. Here is a comparison of three common financial habits of the poor, middle class, and wealthy.
What Is The Payment?
The poor ask what the monthly payment is. At first glance, buying something appears less when paying monthly than purchasing the product with cash. However, this marketing tactic traps you into debt by paying high APY on a credit card, which will also result in you spending more for a product if you fail to make the total number of payments over the terms described in the conditions. It is a double-edged sword that can then be difficult to financially escape.
3 Financial Habits Of The Poor
Live Beyond Their Means
The poor live beyond their means. Rather than saving, they look for ways to spend their money immediately. They make impulse purchases. They live in the moment and seek short-term gratification rather than long-term thinking. The poor are more concerned about appearing wealthy than being rich.
Debt
The poor are in debt and rely upon debt to get by. Many debt traps can ensnare you as society has normalized:
Student loans
Car payments
Medical bills
Personal loans
Payday loans
Once in debt, it can be incredibly challenging, if not impossible, to break free. This is particularly true for low-income earners who allocate most of their income to basic necessities. They make unplanned and unneeded purchases and buy things they cannot afford. They then find themselves ensnared by the financial strain of high interest rates from credit cards and other unsecured debt, which perpetuates their poverty and hinders their upward mobility.
Do Not Plan For Retirement
They do not have any leftover money since they struggle living paycheck to paycheck. The poor cannot invest retirement money between debt and overspending. As a consequence, they have no plans for retirement.
Those in the lower class were never taught the basics of financial education to save money or see if an employer may offer a matching 401(k) plan. They are struggling to pay their bills now, so to have extra money to direct to retirement seems like a pipe dream.
Can I Fit It Into My Monthly Budget?
The middle class asks if it fits my budget. The information about whether it is within a monthly budget informs someone if the person can afford a product.
3 Financial Habits Of The Middle Class
Follow A Budget
The middle class sticks to a budget by monitoring their monthly expenses and income. They aim to have some money left over at the end of the month to save. They make an effort to avoid living paycheck to paycheck and to build their financial security.
Save Money
The middle class aims to save money every month. With interest rates higher than during the zero interest rate policy(ZIRP), it's beneficial to consider a high-yield savings account. This option offers a higher interest rate than a standard savings account, potentially significantly increasing your savings.
Another smart financial move by the middle class is setting aside money for longer-term purchases. A Certificate of Deposit (CD) is a popular choice for this, whether it's for a car, a house, or a larger investment. This disciplined approach to saving ensures you're financially prepared for significant expenses.
Invest Money In A Retirement Account
They look to see if their employers have a matching 401(k) account. They aim to maximize their Roth IRA account if they have one. After investing the maximum in their retirement accounts for the year, they may have money invested in the stock market.
What Is The Price?
The wealthy ask what the price is. The price informs them if they can buy it outright with cash. If they cannot buy it today, they will be patient and delay the purchase for later. Or they may change their mind about needing a product or service.
3 Financial Habits Of The Wealthy
Live Below Their Means
The wealthy are frugal and live below their means. Frugality allows them to continue to save money and invest it in income generating and financial assets, which increase in value over time. Since they hold them for the long term, price fluctuations in the short term are not a concern.
Long-Term Thinking
The wealthy think about the long-term value of money. The rich are not concerned about making money to live for today. The wealthy seek strategic ways to preserve their diversified wealth among various financial assets. The wealthy often think in terms of generational wealth.
Work With Professionals To Protect Their Wealth
The wealthy work with professionals, from accountants to CPAs to financial professionals, to help them preserve their money assets and minimize the amount they pay in taxes and capital gains. They do this legally by following specific provisions in the tax code, such as the capital gains tax rate, utilizing deductions like charitable contributions, and setting up estates and trusts to minimize how much is paid each year in their taxes.
For instance, they might establish a family trust to pass on wealth to future generations. The rich aim to maximize and preserve their wealth by working with and paying professionals who understand how the tax, financial system, and business infrastructures work.
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Summary
Your financial habits play a direct role in determining your economic status. When you choose to save, spend, or invest your money daily, you impact your financial well-being. The great news is that you can improve your financial future by changing your habits.
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