Becoming wealthy is not easy. It takes hard work, a sound strategy, and continued perseverance. Moreover, becoming wealthy means taking action versus looking for good things to happen to you or looking elsewhere for opportunity. While there are a number of reasons or challenges to individuals becoming wealthy, in this post, I’m going to walk through five reasons that are fairly common in explaining why people fail to become wealthy.
Photo by Wm Jas via Flickr
If you have comments or would like to add reasons you think might be just as appropriate, I encourage you to add your comment below.
#1 – More Likely To “Keep Up With The Joneses” Versus Investing Money Into Assets
Us Americans are very much enticed by the latest and greatest. Further weakening us is the mysterious yet powerful force that pushes us to “keep up with the Joneses.” We judge people by their appearances far too often including the financial health of a person. The reality is that a rich person might drive a crappy car while your neighbor with the brand new BMW might be broke.
We need to focus much more on investing our money into assets instead of pouring it into shiny consumer products. We need to chase long term returns and a portfolio of assets versus a short-term emotional highs by showing off our latest gadgets, cars, boats, clothes, watches, house, or you name it. We need to chase financial freedom, not fancy things.
#2 – Debt Allows People To Buy More Than They Should
Unfortunately, our society is obsessed with debt. The biggest reason debt is destructive is that it allows you to buy more than you can afford. Debt allows you to break free of the restriction of living within your means. Never mind the interest payments which kills your pursuit of wealth. Just the simple act of buying more stuff than you should is a major reason people don’t become wealthy.
For the record, this concept applies to a home as well. For far too long, mortgage debt has been labeled “good debt” and buying a huge house that you can’t afford has been labeled a “smart investment.” Housing is an expense and debt is debt.
#3 – We Allocate Too Much Money Into Depreciating Assets
Quick question: how much of your money is going into depreciating assets and how much of it is going into appreciating assets? This is an important question to ask yourself. Sure it’s fun to drive a nice car, but far too many of us put more money than we should into depreciating assets such as a car.
A simple rule of personal finance is to allocate as much money as you can into assets that will earn a return or grow in value and as little money as possible into things that will lose value. The more extreme you take this concept, the more wealthy you’re likely to become.
#4 – We Are Too Comfortable Earning A Paycheck
Far too many Americans are comfortable earning a paycheck for the rest of their life or being an employee for the rest of their life. It’s very tough to become significantly wealthy by earning a paycheck. Yes, there are executives of Fortune 500 companies that make big time money, but we’re talking about a very, very small minority of the paycheck earning population (the exception to the rule).
Americans need to become more entrepreneurial focused. Financial freedom is often found in the realm of entrepreneurship, but succeeding in this realm has some pre-requisites. These pre-requisites are often talent, hard work, and capital (savings). If you’re not ready to start your own business, that is completely normal, but make sure you’re doing things now to get you to that level of readiness such as putting money away and learning the necessary skills.
#5 – We Take The Wrong Kinds of Risk
Piggybacking off reason #4, it’s interesting what kind of risk most of us are comfortable with and what kind of risk we’re not. For example, we’re very used to signing our name on a mortgage that commits way too much of our income to a mortgage payment each month. One slip of our income, and we’re in major trouble. That’s definitely a level of risk. Or, we’re very comfortable allocating 100% of our savings into the stock market despite stocks being incredibly volatile (see May 6th, 2010). For a last example, we’re also comfortable putting our complete financial future in the hands of another company or person versus maybe taking charge of our future by starting a business. Yes, starting a business has its risks but so does working for somebody else. It’s time to re-evaluate risk in our lives.
Why do you think most people fail to become wealthy? Join the discussion below.
Kevin is the writer behind 20smoney.com. 20smoney.com focuses on aggressive investing, developing income streams, money management and more with advice targeting 20-somethings. You can read more about his pursuits of online income and financial freedom.
These are all very good points. Especially 4 and 5. Well done.
I like the perspective of this article. It is implicitly saying that it is quite possible to become wealthy – you just need to avoid making certain mistakes.
I think many people don’t recognize the truth of that. People imagine that you need to do something special to become wealthy. For a great many people, that isn’t the case: they can achieve wealth if they avoid the pitfalls that so many fall into.
Well I feel the most important reason why people fail to become wealthy is that they are scared of taking risk. Investment involves taking risks and it is difficult to become wealthy without investments.
There is no insurance that anyone can become a millionaire but you can be very comfortable living within or below your means. Making responsible choices and not squandering what you have leads to wealth, in my opinion. Being satisfied and having enough already leads to savings.
People should start learning about financial education in high school, and yet they don’t start until they graduate college. Also, credit cards are for building credit, not buying things you can’t afford.
I think belief and sacrifice.
If you don’t believe that you will not be any wealthier than you are now, then how can you expect to become wealthier?
After you believe it is possible, you must use a spreadsheet or some type of financial tool to accomplish the feat! It’s possible and you must make it happen by cutting out extra expenses. Make your savings delta a large positive number!!!
Nice points in the post… by the way 🙂
The first step is always the hardest. These are great points, especially the one about becoming way too comfortable with the paycheck!
The biggest one is lack of planning and second is trying to compete with your “rich” friends.
You make great points above about buying shinny things. it is way more cool to have $500,000 in the bank and drive a Honda than have $50,000 in debt and drive a Mercedes.
What? Getting rich takes work? Forget that. Who wants any part of that?
All the financial books say getting rich is easy, if you just buy their book or their tape set.
Most people fail to become wealthy due to the fact, truth, and reality, that they are lazy people with their money to make it grow. Lazy people are not energy focus to be active with their financial
life ! Just too lazy and not inspired to have freedoms with comforts !
HELP is it possible to make 10% net with very conservative unbending finantial advisors?is there another way? i am 67 years old with no debt and no heirs.i have about 1,000,000$ to invest to live on and want to stop worrying.advisors tell me 5% return is great. is it? i have no money coming in and cant afford risk.i’m divorced. can i sell insurance i have on exhusband?
@Sanda: 10% with very conservative investments is virtually impossible. I would say 5% of “very conservative” investments is very ambitious. It depends on your definition of very conservative, but when you consider stocks have averaged 12% returns historically, 10% is a lot closer to stocks (risky investments) that money market/CDs/bonds (conservative investments).
Whats the deal with becoming wealthy? Its the wrong question to ask of life. I have a good job, good family, but no car, no TV. Am more than happy.
too many people don’t make it to financial freedom or wealth because we are taught to work for our money instead of being taught how it can work for us. I spent my 20’s being the average stupid kid who wanted to try everything. in my early 30’s i made a stupid career move which cost me all my retirement savings as well as a decent earning job. In my late 30’s i went back to my old job at entry level and have spent the last 5 years working my way back up the ladder. In doing so i… Read more »