Money Mistakes (plus solutions!) of the Poor & Middle Class

By Tim Gamble

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This article was inspired by an old episode of the Dave Ramsey radio show. 

Common money mistakes typically made by folks in the lower and middle classes can lock them in place financially-speaking, preventing them from improving their circumstances. These mistakes tend to be learned by example, unintentionally passed on from one generation to the next, thus dooming generations of the same family to the same financial struggles. The mistakes made are different between the classes, but are easily identifiable, as are the solutions.

The Poor

The money mistakes made by the poor are mostly related to the desire or need to get quick, easy money for a myriad of potential reasons - anything from an unexpected repair expense to "the rent is due and I don't have enough cash to cover it."  This problem is caused by a combination of poor planning and lack of capital (savings). Here are some of the specific mistakes the poor often make in trying to get quick cash:

• Playing the Lottery - Studies have shown that the majority of lottery tickets are sold in poorer zip codes. Lotteries really are a sneaky tax on the poor. Other forms of gambling fit this category, too.
• Pay Day Loans - These loans are easy to get and therefore very popular, yet with their extremely high interest rates and short pay-back periods, typically the next paycheck, these loans trap folks in never-ending cycles of doom. (Note: In recent years some banks and credit unions have started offering these type loans, although usually at much cheaper interest rates than private lenders. This may help some folks wean themselves off pay-day loans, but you still need to be aware of interest rates and penalties.)
• Car Title Loans - A high-interest way to lose your car.
• Pawn Shops - Ever notice that these flourish in and near poor areas? There's a reason for that...
• Rent to Own - High-interest installment plans on furniture and other items that were already overpriced to begin with.

The Middle Class 

The money mistakes made by the middle class are mostly related to living beyond their means, often to keep up appearances in order to impress others. The more their friends and neighbors do it, they more they feel pressure to buy new cars, the most house they can afford rather than the house they actually need, to take impressive vacations, and so forth. Here are some of the specific mistakes the middle class make while trying to "keep up with the Joneses":  

• Credit Cards - There is over 1.3 trillion dollars of credit card debt in America, the vast majority of which is owed by the middle class.
• Student Loans - There is nothing wrong with going to college, but there is something wrong with racking up tens of thousands of dollars in debt to get a degree in18th century French Poetry, Gender Studies, Social Justice, or some other useless major.
• Car Payments - New car fever grips the middle class, with excuses like "I need it for work" and "safety and reliability." But, in reality, a well-maintained used car can be just as safe and reliable as a new car. Keep it clean and washed, and it'll probably be fine for work, too. Also in this category are payments for boats, motorcycles, ATVs and other expensive toys.
• Loans or early withdrawals from retirement funds - Not only does this deplete your retirement savings, but potentially has severe tax implications.

Solutions

Reading through the above lists, the solutions should be obvious - Don't do those things! But how to get there from where you are now is the real question. Here are three ways to get there:

• Build capital (emergency savings) - This is HUGE to your financial success. Do whatever it takes to build savings: Work extra hours, get a second job, have a massive yard sale, sell those expensive toys (ATVs, boats, home gyms, and so forth), downsize your car to get out of the payment, maybe even downsize your house if it is more than you really need... 
• Be happy living within your means - This is an attitude adjustment, which is especially hard for many people. You CAN be happy without a brand new car, or without taking a Caribbean cruise this year or a Disney vacation, or without yet another pair of $300 shoes. Don't worry about what your neighbors have, or what your friends might think about you. Live within your means, and be happy with it.
• Delayed gratification - Back in the days before credit cards, installment plans, and payday loans, if you wanted something you had to save money until you had enough to buy it outright. This meant you had to wait to get it. These days, Americans feel entitled to whatever they want, and entitled to it NOW! Banks and credit cards companies have made fortunes off this entitlement attitude. Developing a little patience will go a long way to you making your fortune!

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