Warren Buffett: These 5 Money MISTAKES are Keeping You POOR

But there's been an American nightmare that has accompanied that. And that's where people that equally have tried to get educated and worked hard and had good habits have found themselves living a life that's been on the edge throughout their entire lives; and the same for their children. It's estimated that a whopping 62% of Americans are now living paycheck to paycheck, which works out to a staggering over 200 million people that are barely getting by financially.

Unless you want to be one of them, you need to watch this video. We're going to cover the five mistakes you need to stop making right now to either help you stop being broke or make sure you never end up in a bad place financially. And this is not coming from me; this is coming from legendary investor Warren Buffett. You need to stick around till the end of this video because this advice from Buffett will truly change your financial future. And I can say that with 100% confidence because it sure changed mine.

Let's get into the list.

The first mistake people make when it comes to money is not being thoughtful about their spending. Warren Buffett is known for his extreme frugality. Despite being one of the world's wealthiest people, Buffett seemingly gets enjoyment out of saving every last penny he possibly can. The license plate on his car even spells out the word "Thrifty." Buffett has even been known to pay with coupons whenever he takes a friend or business associate out to lunch.

Given his reputation, you would think that Buffett would advocate for everyone else to follow this extreme level of financial constraint; however, that is not the case. Instead, Buffett advises that each person has to decide for themselves whether the things they are spending money on truly make their life better. Listen to Buffett explain. "Who's to say whether it's better to defer a dollar of expenditure on your family on a trip to Disneyland or something that they'll get enormous enjoyment out of so that when you're 75, you can have a, you know, a 30-ft boat instead of a 20-ft boat?"

Being thoughtful about your spending allows you to cut out unnecessary costs, helping you save more money and build wealth. Most financial advice here on YouTube tells you that you should save money by making yourself coffee at home and never going out to eat. I myself used to even believe that was the best approach until I heard Buffett talk about the importance of being thoughtful with your spending. If going to a coffee shop a few times a week truly brings you joy, it would be foolish to cut out this expense just to save a few dollars.

Unfortunately, the vast majority of people don't follow Buffett's advice. Instead, they spend money just so they can keep up with the Joneses. As the old saying goes, they buy the new car and fancy clothes because it seems like that is what they are supposed to do. They never stop and ask themselves if all of that spending even makes their life better in the first place.

Here's a story from Warren Buffett's life to demonstrate this principle. Buffett got married in 1952 at the age of 21. Warren's net worth at that time was $10,000, money that he was able to scrimp and save through his paper route and various other side hustles he had growing up. Despite being incredibly frugal, Warren spent 6% of his entire net worth on his wife's wedding ring—quite an extravagant purchase for someone known for being so cheap. What is even wilder to think about is that if Warren had instead invested that money, it would have been worth a staggering $29 million by his 91st birthday.

However, Buffett does not regret this purchase. He even went as far as to call it the single best investment he's ever made. "I've never bought a piece of jewelry that I regretted."

The next money mistake people make is having expensive hobbies. Learning more about money doesn't mean all work and no play. Despite managing a company worth roughly $850 billion, Buffett still finds time to do activities he enjoys outside of work. But compared to other famous CEOs, investors, and entrepreneurs, Buffett's hobbies are much more affordable. For example, one of Buffett's favorite pastimes is playing the card game Bridge. Buffett has frequently said that every day after work he goes on his computer and plays a free online version of the game. Buffett gets hours of fun and enjoyment out of a hobby that costs him virtually no money at all.

Resisting the urge to get expensive hobbies is part of the broader concept of avoiding what is referred to as lifestyle inflation. Here's Buffett explaining how understanding this concept is incredibly important in order to have an enjoyable life. "I tell this to college students that I talk to. I mean they are basically living about the same life I'm living. Uh, you know, we eat the same foods—I mean that I can guarantee you—and there's no important difference in our dress. There's no important difference at all in the car we drive; there's no difference in the television set that we sit there and, you know, watch the Super Bowl on or anything of the sort. There's really no difference in, you know, they've got air conditioning in summer and I've got air conditioning. I got heat in winter. Almost everything that's any importance in daily life we equate on."

The one thing I do is I travel a lot better than they do, you know, Net Jets, as Buffett mentioned in that clip. When most people start working full-time, they have a pretty basic life. They likely have all their needs met, but it's far from a luxurious lifestyle. However, over time, as people progress in their career, they start to make more money. Instead of using that money to increase their wealth through saving and investing, they instead upgrade their lifestyle—getting that fancy apartment, buying a nice car, picking up expensive hobbies. The list goes on and on. However, after a certain point, all of those nicer things don't even lead people to have a happier life.

The next mistake most people make when it comes to money is paying high fees for investments or financial advisors. When it comes to investing, fees are the silent destroyer of wealth. To show you what I mean, here is John and Michael. John and Michael are completely the same in virtually every way. They are the same age; they both get paid the same at their jobs. John and Michael even invest the exact same amount of money each and every month. With this information, it would be logical to assume that at the end of their careers they would both have the same amount of money in their investment account.

However, as you're about to see, that is not the case. While it may seem like a very small detail at first, there is one difference between John and Michael that has a massive impact. That difference is the fees they get charged on their investments. You are about to see exactly why fees matter. John is able to save and invest $1,000 a month. That comes out to $112,000 each year over his 40-year career. For this example, let's say John is able to generate a 10% annual return. 10% has been the average historical rate of return for the US stock market over the last roughly 100 years. At the end of the 40 years, John will have a whopping $5.3 million, despite only investing $112,000 each year. This shows the magic of compound interest.

Now we have Michael. Michael is also able to save and invest $112,000 a year over his 40-year career. However, unfortunately, Michael didn't pay attention to investment fees. Between paying his financial advisor and the high-fee investment products, Michael's money was put in fees, which lowered Michael's average annual return by two percentage points. Two percentage points doesn't sound like much, but as you're about to see, it matters big time. Instead of the 10% annual return John got, Michael's annual return was lower—two percentage points to 8%. Because of fees, at the end of the 40 years, Michael has $3.1 million.

Now don't get me wrong; this is still a ton of money. However, it is over $2 million less than John. John and Michael both worked incredibly hard over their careers to build wealth for themselves and their family. However, Michael not paying attention to fees cost him a staggering $2 million of wealth that may as well have been taken directly out of his pocket. This shows why avoiding fees when it comes to investing is so important. Thankfully, John watched this YouTube channel, so he knew how important it is to avoid fees when it comes to investing. Which, by the way, that reminds me, make sure you subscribe to the channel because I want to teach you everything you need to know to be able to get rich like our friend John here. Our community has recently passed 300,000 people and is getting larger every day. It's my goal to help you on your wealth-building journey completely for free. All I ask for in exchange is for you to hit that subscribe button.

Number four on our list of money mistakes is living in too expensive of a house. One of the biggest reasons people have difficulty getting ahead financially is that they are what is referred to as "house poor." This means that a very large percentage of their income covers their housing expense, making it incredibly difficult to save money. The financial system in America is designed to make people house poor. When someone goes to purchase a house in the United States, they are told how much they can "quote unquote" afford to spend based on what is called their debt-to-income ratio. A debt-to-income ratio is calculated by taking the monthly payment for their house, plus any other debts, and dividing that number by their monthly pre-tax income.

In the eyes of the bank, if this ratio is below 43%, they are likely to approve the loan. So if a couple makes $10,000 a month, assuming they have no other debt, they can afford— in major quotation marks—a $4,300 a month housing payment. However, this large housing payment makes it virtually impossible for this couple to save money. That $10,000 monthly income number is before tax; taxes will probably take $3,500 out of that amount, leaving this couple with an after-tax income of $6,500. That means that a staggering 66% of this couple's after-tax income is going to the housing payment each and every month. Two-thirds of their income is gone before even factoring in things like transportation, food, clothes, or anything else. There is no way this couple is going to be able to save money.

This is what it looks like to be house poor. You make a solid income, but a huge chunk of it is going to housing. As people progress in their careers and make more money, it can be tempting to want to upgrade your house or apartment. Listen to Warren Buffett's business partner Charlie Munger explain why that's a mistake. "You are not somebody who spends a lot of money on yourself. We are living—we're sitting here in a beautiful house—but this is a house that you lived in for 70 years. I know I've lived in this house for about 60 years. We're similar. But you see, we're both smart enough to have watched our friends who got rich build these really fancy houses, and I would say in practically every case they make the person less happy, not happier."

The fifth money mistake people make is using credit cards. "My general advice to people, I mean, you know, we have an interest in credit cards, but I don't, I think people should avoid using credit cards as a, you know, as a piggy bank to be raided. I had a woman come to see me here not long ago, and she'd come on a some money and, uh, not very much, but it was a lot to her. And uh, she's a friend of mine, and she, uh, she said, what should I do with it? You know, and I said, well, what do you own on your credit card? And, uh, she said, well, I own X. And, uh, I said, well, what you should do—I don't know what interest rate she was paying, but I think, you know, may I think I asked her, and she knew, and it was something like 18% or something. I said, I don't know how to make 18%. You know, I mean if I owed any money at 18%, that first thing I do with any money I had would be to pay it off. It's going to be way better than any investment idea I've got."

When Warren Buffett is asked what his number one piece of financial advice is, the answer is simply avoiding credit card debt. Buffett's entire investing career has demonstrated just how powerful a force compound interest is. Compound interest is when you earn interest on both the money you've saved and the interest you have already earned. Think of compound interest like a snowball rolling downhill. At first, the snowball is small, but over time it gets larger and larger. Compound interest is wonderful when it's working for you; however, it can be just as devastating when it's working against you.

As of the making of this video, the average interest rate on credit card debt in America is roughly 20%. That is more than double the long-term average annual return for the US stock market of 10%. This is why Buffett says it's more important to pay off high-interest-rate debt than it is to even invest in the stock market. Having high-interest-rate debt is a lot like shoveling snow during a snowstorm. Imagine you’re tasked with shoveling a massive parking lot during the middle of the biggest snowstorm in generations. You work incredibly hard clearing the snow. You put your head down and work nonstop, clearing row by row of the parking lot. You finally get to the other side and are incredibly proud of all your hard work getting the job done. You turn around to admire your accomplishment and are shocked to see that the parking lot is once again covered with snow. It's almost like you didn't even shovel in the first place.

This is what it's like having high-interest-rate credit card debt. The interest rate is so high that despite making payment after payment, you never seem to be able to make any progress paying down your balance. As millions of Americans know, getting out of credit card debt is not easy. This is why Buffett warns to do everything in your power to prevent yourself from falling into that trap to begin with.

So there we have it. Make sure to subscribe to the channel because it's my goal to make you a better investor by studying the world's greatest investors. Talk to you again soon.