Are you tired of feeling like you’re always struggling to make ends meet? Despite your best efforts, you might find yourself stuck in a cycle of financial hardship or might be caught in hidden financial traps without realizing it. The truth is, there are several common pitfalls or financial traps that can keep you from achieving financial stability and success.
In this blog, we’ll uncover seven key factors that might be holding you back and offer actionable strategies to break free from these traps. Whether you’re looking to improve your savings, manage debt more effectively, or boost your income, these insights will help you take control of your financial future and pave the way to lasting prosperity. Dive in and discover how to turn your financial situation around today!
Switching careers quite often
“Sir, I am a qualified chartered accountant with an MBA, and I have a good job, but I am planning to switch careers. Should I go for a PhD?”
“Sir, I have done MBBS and work in the public sector, but I am planning to switch careers and go into data science. Should I pursue it?”
I have met hundreds of people facing the same dilemma about switching careers. What many don’t realize is that switching careers can be very costly, not just in terms of money, but also in time and effort. For example, pursuing a PhD requires four to five years of continuous commitment. If your goal is long-term financial success, another degree or a complete career switch might not be the best route.
One thing I’ve noticed among those who do well financially in the long run is their expertise in at least one area, around which they build their careers. A friend of mine started as a low-paid data entry clerk but continuously learned new skills related to data science. In just five years, he established his own firm with ten employees. He never asked whether he needed another degree or a career switch.
Malcolm Gladwell’s 10,000-hour rule shows that becoming an expert in a field requires about 10,000 hours of dedicated practice. If you work on one skill for four solid hours every day, it will take almost seven years to master it. Only then will you be in a position where people pay you hundreds of dollars for a tweet, blog, or speech. Focusing on multiple careers at once dilutes your efforts and delays your success.
Advice: Make a Vertical Shift Instead of a Complete Career Change
If you truly feel you’re in the wrong career and want to switch, consider making a vertical shift within your area of expertise. For instance, a colleague of mine, a qualified accountant, was dissatisfied with her job. Instead of switching careers entirely, I suggested her to make a vertical shift—keeping her accounting and tax knowledge but changing her role. She chose to become a teacher and did very well. Rather than completely switching to data science after MBBS, choose something within the same domain but with a different focus.
1. The Employee Mindset
One thing that keeps people living financially mediocre lives is their mindset.
I asked a client, ‘Why are you pursuing a new degree?
He said, ‘I’ll get a promotion.’ I inquired of another, ‘Why are you pursuing an MBA?’ He replied, ‘I want to learn a new skill.'”
There’s nothing wrong with pursuing a new degree or learning a new skill. The problem arises when you’re spending your time, effort, and skills for someone else’s benefit. You’re getting better so you can serve better. As long as you’re working for someone else and only improving your skills to serve them well, I guarantee you won’t be better off financially in the long run (Financial Trap).
In contrast, those who achieve remarkable financial success often have the mindset that they need to work for themselves in the coming years. One of my close friends, after completing his MBA, started working as a sales representative for a local company. I asked him why he was doing it for such a low salary and minimal perks. He smiled and said, “I’m not working for them; I’m working for myself.” Every single day, he reached out to 10 to 20 people to sell the company’s product, faced rejection, endured harsh attitudes, and dealt with his boss.
He persevered because he saw this job as a means to an end—his own sales agency. He worked in this company for one and a half years, maintaining a small diary of lessons learned, mistakes made, and compiling an action plan for his own business. After one and a half years, he opened his own sales agency and never looked back. That was 25 years ago. Now, he runs a thriving business with multiple sales agencies.
Advice: Shift Your Mindset from Employee to Employer
No matter what stage you are in your career or what type of nine-to-five job you have, if you truly want to earn more and become financially independent in the long run, change your thinking pattern from employee to employer. This doesn’t mean you should quit your job or stop pursuing degrees; it means that if you are learning a new skill or going for a new degree, it has to be tied to your financial goals, not the goals of others.
2. Over-Focus on Saving
I know many people who are excellent savers. They have unique ways of saving money and are always on the lookout for new methods. For example, a neighbor of mine drops his kids off at school on his way to work, and his wife, who also works, picks them up on her way back. This saves on transportation costs. Another friend has a fixed budget for family outings and never overspends. Saving is an excellent habit and a prerequisite for becoming wealthy. So, if you have the habit of saving money, I congratulate you. However, there is one small problem with this approach.
People who focus solely on saving sometimes miss the potential for increasing their income. Their minds are constantly searching for new ways to save rather than new ways to make money. Take my friend, for example. He saved the van fee by driving his kids to school. I ask him he should give this work to school transportation provider and instead pick up an Uber ride on his way to and from work. He started making three times the amount he was saving.
The point is that saving is a good habit, but do not solely focus on it. Also, put your mind to work finding new ways to make more money, even small income streams.
Advice: Find Different Streams of Income
Escape this financial trap, try to identify different streams of income and link them to recurring expenses or activities. A friend of mine has a nine-to-five job but offers tax consultancy services after work. He sets aside this extra income exclusively for family outings and hangouts and never missed out any event. Another friend owns a small shop and receives rental income. He never uses this rent for recurring expenses like groceries or travel costs. Instead, he allocates this amount for his kids’ education, ensuring he never worries about tuition costs.
3. Not Investing
If you ask rich people what makes them wealthy, most will answer: Investments. Investments are one of the main, if not the only, ingredients to getting rich. Many people who remain in financial trap or trouble are those who invest the least. They might make good money throughout their lives and even have good financial habits, but what’s missing in their financial decision-making is investment.
One primary reason people don’t invest is that they don’t know where to start. They refrain from investing because of the many horror stories about people losing money in crypto, stocks, or property brokerage. As a result, many either do not invest at all, or if they do, they keep money in high-yield savings accounts. The problem with this type of investment is that, in the former case, their money loses purchasing power, and in the latter, the money invested does not grow in real terms, as it only covers inflation.
Others have savings but don’t know how to choose investments aligned with their goals. They take advice from peers and other easily available sources, which might not equate to professional advice. Consequently, they choose investments that are not suitable for their goals. For example, stocks are a popular investment vehicle with various options. You can invest directly in stocks by opening a brokerage account or indirectly through mutual funds, ETFs, etc. Knowing which option suits you requires knowledge, skills, and patience. Without it, you might lose your principal amount.
Advice: The Long-Term Approach to Investments
When you think of investments as a means of growing your money, think of a fruit tree. To get the fruit, you have to sow the tree, nurture it for a long time, and then patiently wait for it to bear fruit. Similarly, investments are beneficial only when you have financial literacy about them, they are tied to your goals, and you plan for the long term.
4. Spending Patterns
One of the famous books, “The Power of Now”, illustrates the journey of spiritual enlightenment by living in the present. The author emphasizes how living in the present moment can help you overcome worries. It’s a wonderful book to read. However, when it comes to spending, applying the same psychology might be dangerous.
I know people who have the habit of spending without thinking about tomorrow. Their mentality is “Spend today and don’t bother about tomorrow; if we have money now, we will have it tomorrow, so no worries.” The problem with this type of mentality is that it becomes a habit. Once you start spending habitually, you cannot differentiate between your needs and wants. You will buy a new mobile even if you already have one because you want it, not because you need it. You might go for the latest model of a laptop only because you desire it, and the same goes for most of your purchases.
If you keep doing this, there comes a stage when you fall prey to credit card debt or a vicious cycle of debt. Ironically, there is no simple solution to this, as spending patterns are unique to every individual and based on personal characteristics, family history, and other factors. One thing that can help a little is to download a simple budget app and start tracking your expenses. Initially, it will be difficult for those who love spending to track their expenditures, but once you get used to it, it is a very good way to curtail your extra expenses. Keep in mind, that this is not a permanent solution.
Advice: if you think you are okay with your spending patterns, fine. But if you really want to control your behavior and believe it is costing you money, then you have to take a bitter pill—self-denial. If it’s lunchtime and you’re craving a McDonald’s burger, don’t buy it—eat rice instead. If it’s the weekend and you plan to watch a movie, don’t—read a book instead. If you want to buy a jacket because it looks nice, delay your purchase. It’s only when you start denying your small wants and needs on a daily and weekly basis that you will have enough courage to curb big impulsive buying. Remember, all big journeys start with small fa.
5. Using Credit Cards Incorrectly
The digital age has provided many benefits to society; however, sometimes these benefits become burdens. One such example is the credit card. When used properly, it’s a great tool for making purchases with short-term, interest-free loans. Unfortunately, for many, this isn’t the case. Human beings are naturally inclined to spend rather than save, and in this journey, the credit card seems like a good friend helping you in times of need.
The problem arises when this “friend” reveals there’s no such thing as a free lunch. It remains helpful as long as you pay your credit card bills prudently. But once you start relying on it, it encourages you to spend beyond your means. As a result, you accumulate debt, often living with it for the rest of your life.
The biggest problem I’ve seen among people who carry credit cards is the change in their behavior. Finance isn’t just about numbers; behavioral finance has emerged as a field that explains people’s financial behaviors. A core topic within this field is the irrational financial behavior associated with credit card usage. People I know well who use credit cards somehow accumulate debt over the long run. They always claim to use their cards wisely, yet they end up in debt at some point in their lives, and achieving a zero-debt status seems like a distant dream for them.
Credit card use often shifts behavior regarding spending, saving, and investing. People struggle to save, spend more than they have, and invest less. If you can avoid using credit cards, do so—it will solve many of your financial traps and problems.
Advice: Use Credit Cards for Good Debt, Not Bad Debt
If you really need to keep a credit card, use it to accumulate good debt rather than bad debt. Good debt means using credit to build assets, such as a car or a laptop, which will benefit you for many years. Bad debt means using credit for vacations, groceries, or impulsive purchases that won’t last. Another strategy is to replace your credit card with a debit card, so you won’t exceed your limits. This simple switch can help you manage your finances more effectively and avoid the pitfalls of credit card debt.
6. Ignoring Charity
If you need to prioritize the seven factors proposed in this article, put this one at the top: charity. The science behind it is unclear, but it always works. When you start giving to charity, something happens, and you begin attracting money. Perhaps it’s due to the blessings you receive from those you help or the activation of the “give and you shall receive” principle. Whatever the cause, it’s both surprising and satisfying.
I cannot count the examples where people started giving money and still remain poor. A famous story illustrates this: a poor man went to a wise man and complained that his income was too low to meet his expenses. The wise man said, “Give charity.” Surprised, but obedient, the poor man did as he was told. A few days later, he returned with the same problem and received the same advice. One day, the poor man came back very happy. The wise man asked what had happened. The poor man said, “The investment trick you shared with me not only returned my principal amount but also yielded a big return.”
Advice: Practical Steps for Effective Charity
Almost everyone gives to charity in one way or another, and maybe you already do. But I have found one specific method to be extremely useful. Follow these four steps:
- Fix a Percentage: Decide on a percentage of your monthly income to give to charity. For example, if you earn $5,000 per month, fix 1% for charity.
- Identify a Recipient: Find someone in your family or close circle who is financially struggling.
- Prioritize Charity: Make the first expense from your income this 1% donation to that person every month.
- Keep It Private: Do not advertise your charitable acts. Only you and the recipient should know about this.
Try this method for one year and see how your financial problems start dwindling.