Every Financial Trap Middle Class People Fall Into Explained

0:00Financial traps, the middle class people fall into, including me at one point. Here's a number that should get your attention. Most people earn more today and are not any closer to financial freedom than they were 10 years ago. That's not bad luck, that's design. So in this episode, I'm breaking down the exact financial traps that keep smart, hardworking people just like you stuck in the middle and showing you what actually moves the needle towards freedom, all right? This is building your money machine where we help you master your money. Eliminate financial stress so you can live a life of choice because earning more, that doesn't make it free. A money machine does. And I'm your host, Mel Abraham, and after 30 plus years as a CPA and entrepreneur, a money mentor and someone who's walked the path to financial freedom, screwed it up a few times and got back on the path. I see what works, I see what doesn't. And it's not about bigger numbers, it's about bigger choices. So if you're ready, let's do this. All right, let me start off with a truth bomb.

1:03And it's one that you've heard repeatedly from me. More income doesn't make you free. A money machine does. Getting your money to work harder for you than you did for it is the key to having freedom. It's the way that you can separate your earnings from the efforts to earn it, okay? Because high income without having a machine behind it, a system behind it, that's just a shinier leash. And the fact of the money is that if your money stops working for you, when you stop working, then you're not free. You're rented, you're tied down. All right, so let's pull the curtain back on the things that are actually eating away, the traps that are eating away at your financial freedom or your journey to financial freedom. And I think trap number one is this, income comfort versus wealth progress. This is a big one. If raises made people wealthy, most six figure earners would already be free, but they're not. And here's why, you get a raise, you feel good, you worked hard, you earned it, gold star,

2:04adulting badges unlocked, I get it, okay? But what do you do? So naturally, you upgrade. Nice replace, better car, phone plan gets fancier, eating out goes from special occasion to, it's Tuesday, let's just do it, okay? Nothing feels reckless all of a sudden. But watch what quietly happens underneath, okay? Say you get a $10,000 raise. After taxes, maybe $6,500 actually lands in your account. Now the leaks begin, okay? Car, you upgrade the car for $250 a month. That's $3,000 here. The rent, your rent gets buffed $200 a month. That's $2,400 a year. Lifestyle stuff that you just want to kind of add on, that's $100 a month. So that's $1,200 a year. So all of a sudden $6,600 in upgrades that just poof gone. And it doesn't seem like it's a lot and it's little pieces. But when you add them up, the whole raise is gone.

3:05Nothing's invested, nothing's saved. You're not building freedom, it just got soaked up. It just got absorbed. So now you're living at a higher cost with the exact same stress and here's the line. Lifestyle creep doesn't make you richer. It just makes your stress more expensive. See, freedom doesn't come from income. Freedom lives in the gap between what you earn and what you keep, the margin, if you will. And if that gap never grows, if that margin never grows, neither does your life, that's the key. So here, one of the things I want you to do is to make sure that you make investing a priority. If you get a raise, use the 5050 rule. I say take half of that raise and put it towards your financial future. Take the other half and do some other life things with it. Okay, I'd like you to push more towards your future, but at least put 50% towards your future. Use the 5050 rule. Now, all of a sudden, you'll get some lifestyle improvements

4:08and updates and upgrades. So you're celebrating and you're enjoying it. But at the same time, you're putting more towards your future. All right, trap number two. Delegating your financial life to sales people. Oh, this one hurts because it looks like advice when it's actually sales. See, most middle class families unknowingly outsource their financial future to people who get paid when they sell something, okay? Listen to that again. They get paid when they sell something. Mortgage brokers, car dealers, insurance agents, even banks, not evil, but it's structural. See, they all have one primary objective and it's not your best interest. Their primary objective is close the transaction, okay? It's not your freedom. It's not your cash flow. It's not your future self-sipping coffee on a Tuesday morning because your money machine is paying the bills for you. Think about this. Let's talk about housing.

5:09Because this one is one that you don't even see coming. The bank says, hey, you qualify for $500,000. But here's what you hear. I can afford $500,000. Yeah, no, okay? That's the challenge. See, they approved you based on ratios that assume no lifestyle, no emergencies, no investing priorities. They calculate the mortgage, they ignore repairs, insurance increases, property taxes, furniture, life. They don't think about that. Same thing with cars. But it allows you to take on more debt because you qualify, but can you afford it? And is it a smart thing to do and is it part of the strategic financial plan you're on? See, even the dealers when you go into cars, what do they say? We can get you into this for only $120 per month. See, they never mentioned the total interest or the loan resets or the opportunity costs or the insurance to ensure the car. This is a great way to start to understand things.

6:12Always look for the bias, okay? What don't they say when it comes down to it is that their commission is front loaded. Your growth is back loaded. When they put you into a policy or something or even a mortgage, they're getting all of their interest, all their compensation up front, you're getting all the benefit down the road, okay? So here's the rule. If someone gets paid when you spend more, they're not an advisor, they're a vendor. Just put them in the right category. I'm not saying not to do it. I'm just saying to be really clear of what their bias is and what's going on and how this is done. Because if they profit from the size of your decision that don't expect them to minimize your decision, they're not gonna represent your future. They represent their quota. That's not a money machine. That's a mirage, okay? So I think that we need to understand some of the things that are going on and a lot of times we just kinda go along for the right.

7:15I did. I got taken by a lot of these kinds of situations. I got more to come, but before we get there, let me just talk about something else because if this already hit close to home, I wanna give you something practical right now. As many of us don't know how much our lifestyle is costing us and if we do know what it is costing us today, we don't know what the cost might be in the future and how big of a financial money machine we need to create. So I have something called the lifestyle cost calculate. It's totally free, free to get. We'll hook it up here, melabraham.com, for a slash lifestyle. It'll help you see what your life actually costs now and in the future. Not guess is not vibes, but numbers, okay? Now things will change in the future, but it's going to give you some clarity that you maybe don't have because clarity beats hustle every day of the week, all right? All right, let's go to trap number three, lifestyle creep. This is something, you hear people talk about this all the time, but this one is the one that steals wealth quietly

8:19while you're busy living your life. Lifestyle creep isn't just spending more. It's resetting your definition of normalist, something called the hedonic treadmill. We normalize a level of lifestyle and we don't wanna go back and I get that, that's totally fine. The question is, is your lifestyle built on your own values, your own vision and what you want for your life was built by comparison, by social media, by media, by expectations of others to get status, to get attention. Any of those things, that's a problem. See, the first upgrade feels earned. The second upgrade feels justified. Then the third though, what happens is that it feels required. I got more, I gotta have a bigger life. Soon your old lifestyle feels completely unacceptable. Fixed expenses start to rise, flexibility ends up disappearing and when you have high fixed expenses, that's a problem. Whether it's in a business or individually, okay? So let me put some math on this for a moment.

9:21If lifestyle creep eats just $400 a month that could have been invested, $400 a month at 8% over 30 years will literally turn into over $600,000. That's not coffee money. That's retirement choices. That's building freedom. That's time with people you love. Lifestyle creep doesn't steal money. It steals your options. And I'm not saying to not expand your lifestyle. I'm saying to be deliberate, intentional, conscious aware and make sure it's in alignment with your values, with your vision, with your goals, not someone else's. This is why when I'm working with people in the money machine blueprint or my clients and my students or in the book, we first align to figure out what's the life you want and build the money machine to make that a reality. All right, trap number four. Payment thinking and the minimum payment illusion. Oh man, huge. If you shop based on monthly payments, you've already lost a game.

10:24See, most middle class, they shop based on the payments. Can I afford that monthly payment? Wealth builders, they shop based on the total cost and ownership. Think about this. $45,000 a car. And now we're starting to see what these car dealers are doing. Seven year loan, six and a half percent. First off, a seven year loan on a vehicle is ridiculous, okay? So don't get me started on that. But that's what they're doing. Why are they doing it? So they can get the monthly payment down enough that it looks easier for you. But we don't get into what it's going to cost you. See the monthly payment at that point feels friendly. But the total paid over $56,000. So you just paid $11,000 in interest for transportation. But here's the challenge. Most people trade it in before it's ever paid off. And they restart the clock. And most of the time, they're negative equity

11:25because of how quickly cars depreciate and because they've extended out the payments so long, they didn't pay down the loan enough and they're rolling it into another vehicle. That's not ownership. That's renting your life with leather seats and nice tires, okay? And then you think about it in credit cards. Carry a $5,000 balance at an 18% rate, okay? And just make the minimum payments. That $5,000 purchase becomes $11,000 over time because minimum payments are not designed to help you escape debt. They're designed to keep you politely stuck in it. You think you're managing the debt. The bank thinks you're a subscription. That's the bottom line, all right? Trap number five. Trap number five, maximizing your house, okay? This goes back to what I started with. The bank approved you for some maximum amount, but not the optimal amount. See, banks are approved based on just ratios

12:25on what you can pay, but not what you should pay. So people buy the biggest house that are approved for in many cases. But if the mortgage is eating half your income, reality's gonna show up pretty quickly. You got taxes, you got insurance, you got maintenance, you got repairs, you got something that's unplanned. All of a sudden, vacations disappear, investing stops. You're not putting anything into a 401k. Some appliance broke, the plumbing goes bad. And you're all of a sudden, DEFCON one, okay? But here's the real cost. You can't change jobs. You can't take risks. You can't breathe. You don't own the house. The house owns your choices. That's not for you. When you're looking to buy a house, the first thing's first, make sure that if you're gonna buy a house, you can be in it for long term. Minimum seven years, seven to 10 years is where you wanna be, okay? Second, your housing expenses should never exceed

13:2730 to 35% of your income. When I say housing expenses, mortgage, interest, taxes, insurance, all of it. And when you get into a house, at the beginning, I get it, you may not have enough of a down payment. Minimum 5% down, I like to push to 20%. If it's a first home purchase, you're probably gonna start with 5%. But the bottom line is this, buy it smart and then build up from there. Otherwise, you're gonna be feeling choked. You'll be house rich, cash poor, struggling to create a life. That's not freedom, that's survival in a suit. Trapped number six, fake optimization products. Okay, now what does this mean? It's any product that promises everything usually delivers very little. Here's how this is. When all of a sudden you buy something that is meant to serve multiple purposes, the best example of this is insurance

14:31with investing at the same time. So whole life insurance indexed universal life. And I can see it, I'm gonna get the insurance agents out there, the sales people that are gonna come after me for this. But you know what? Those are good tools for some people, very few people. But when you start to wrap multiple solutions into one product, typically they don't do any of them well. Okay, I'll never wrap investing in insurance policies. You know, the only one that wins is the insurance company and the agent that's getting the huge commission on it. Okay, so what I want you to start to think about is what are these things that people are getting paid? How are they getting paid? Don't be afraid to ask the question how they're getting paid. And when they, something's put in front of you that seems to solve multiple problems at one time and it feels like this is like amazing. I only need this. I want you to break it apart and see,

15:33are they doing all pieces of that well? Or are they doing it well enough that they're getting away with it, okay? How long the same lines is this idea of convenience, okay? One stop miracles, all that stuff is a problem. So what ends up happening is that you're putting money into these products that promise a whole lot, okay? Optimization and all that stuff. And yet you get slow growth, you get limited liquidity, you get blended objectives, you have conflicts of interest and it just doesn't work. Think about these whole life policies that they're trying to tell you about. Oh, well, don't worry, you can get it your money. You can borrow your own money back. But here's the thing. One, they'll usually keep the cash value, okay? And two, it takes a while for you to have any cash value to borrow against it, okay? I literally listened to someone

16:33who put $12,000 into a policy and the cash value was $32.10. Where did the rest go? Someone else's pocket and they're gonna keep doing that for years until the cash value starts to go up but by that time they're $50,000 into a policy. Hybrid products don't make sense in 99% of the cases. You're better off, especially in whole life insurance, to get term life invests somewhere else, okay? Same output, widely different outcomes, okay? So any product that is trying to do two, three, or four jobs at the same time usually does them poorly but their marketing and their marketing speak is really clever and really smart and sounds great, all right? And when it does, back away, find someone that has no bias

17:34that can give you the straight talk around it. And if you can't reach out to me, okay? Get you something that works, solves the immediate problem you have and builds the wealth that you need, you need a system. All right, trap number seven, this is the convenience bleed. This one doesn't feel expensive until you start adding it up, okay? The money doesn't disappear in big chunks on this one. It leaks out in tiny ones. Think deliveries, think subscriptions, think premium upgrades, express shipping. Think about door dash fees, okay? Lord knows I'm looking at some of these door dash fees and you would buy the same food for $20 but when they tack on the fees and everything on it, you're spending almost twice that amount. It's crazy. And so the cost of convenience is eroding our financial future if we're not careful with it.

18:35And so when you start to look at subscriptions, delivery fees and all the fees that are just kind of underneath it meant to start to take it apart, not to be cheap but to be smart to be aware. And look, do we use door dash? Yes, we do. Do we do it all the time? No, we'd probably do it once a week. But at the same time, we're aware of the fees. Can we afford them? Yes, do I want to pay them? Because I don't think they'd go anywhere. I go, no. So a lot of times we'd rather actually just go out, okay? But think about it because all of a sudden, $5,000 a year in convenience can become hundreds of thousands of years over your lifetime in investing and building a money machine. See, you're not paying for that convenience once. You're subscribing to it forever because that money's gone and it's not working for you. And that leads me to trap number eight, performing success.

19:35Here's what I mean by this. Many people go broke trying to look successful, buying based on friends, social media, appearances, trying to buy status, trying to look good, trying to keep up with the Joneses. The Joneses are freaking broke, okay? Instead of buying things based on a plan, instead of having a strategy of plan and a process through that, that when you start to buy things based on temptation, based on status, based on what it would look like, based on the external measures of it versus the internal fulfillment of it. Man, ask yourself this. Would I still buy this if nobody is watching? If the answer's no, then it should be no no matter what, okay? Because here's the deal. All those people that you think are watching you, they're too busy financing their own image. They're not watching you. The appearance of success without the actuality of success costs, all right?

20:39Trapped number nine, emergency optimism. Emergencies you can't plan for because that's the very nature of emergencies. You don't know it. They're not rare, they're guaranteed. They're part of life, okay? And it could be anything from something like a car repair to something crazy like my cancer. It could be an ER visit, a dental crown, a crack tooth. It could be a pet surgery. Here's the thing. When you think about emergencies, especially medical, 60% of bankruptcies are because of medical expenses. And yet you'll hear people say, well, cash is trash. You shouldn't have any cash on you because you're losing purchasing power. The purpose of having liquidity and an emergency fund and a peace of mind fund is not to build wealth is to protect the wealth. And so without savings, without having that cash and I yield savings account, every surprise becomes debt. Every surprise becomes a burden to, it starts to sink the ship. An emergency fund is not boring.

21:40It's your financial oxygen. It's the thing that's gonna get you to survive when all of a sudden something unplanned happens. 60% of people do not have enough in the bank to cover themselves for an unplanned $1,000 expense. That is a train wreck waiting to happen. I don't want that for you. Trap number 10, retail therapy and brand identity. This is another big one. Shopping isn't fixing your stress. It's becoming it. Stress by dopamine. Guilt, then repeat. That's the cycle. And then you add to it brand identity. Oh, I gotta have these brands. Now you're paying for logos and stores. You're not treating yourself. You're meditating with merchandise. That's not self-care. That's debt with better packaging. This is the thing that starts to drive us because we're doing it for outside because we think that it's gonna make us different. The fact of the matter is that marketing,

22:42they market to us like crazy and they give us identity figures. I want to be just like that. I want to drive that kind of car because look at the success. Now it's totally fine if you can afford it. If it's part of the plan, it's not if it's gonna bury you. Trap 11 is delaying investing. This is huge. Okay, this is what a lot of people do. Waiting doesn't delay wealth. It deletes it. You start investing at 30 and invest $500 a month or you start at 40 with the same $500, okay? The person who started at 30 is gonna have over $1 million. The person who started just 10 years later, the same amount will have about half. Same effort, half the result. That's the power of competitors. I'm not gonna spend a lot of time on this. I need you in the game. If you want to win the wealth game, you have to be on the field playing. I don't care if it's $5, $10, $50, $100, $500. I need you on the field winning the game and I need you on the field now, okay?

23:44Because your wealth, the acceleration of your wealth only responds to time, all right? Leads me to the last trap and that is side hustle, the side hustle band-aid. You can't hustle your way out of back, bad habits, okay? Most of your wealth building is based on behaviors. Side hustles are not bad, but if you're using them to avoid fixing a spending problem, cutting $500 in expenses pays you forever. Earning $500 requires your constant effort. So don't use your side hustles to alleviate bad spending habits. Use them to build wealth. You don't need another job, you need the system. You can't out earn broken behavior, all right? So listen, the thing that runs things, middle class, it's not the income. It's a behavior problem and patterns that can be changed. Real freedom comes from intentional gaps and ownership thinking and automating, investing and values based spending and building a money machine.

24:48Change the pattern, everything changes. Because earning more doesn't make you free. The money machine does. It's time to build the dog on machine. It's time to do this and avoid the traps that are set up for us because we live in a system of marketing. We still live in a system of comparison, all right? Let's not fall for it, all right? I hope that this helps. I hope that you get a chance to look at this to a different set of eyes. And that, tell me, let me know. DM me, send me a comment, which one of these traps have you fallen into? Okay, because I know I've fallen into many of them, all right? I'd love to hear from you. I'd love to have the conversations with you all. And if you haven't done so already, do me a favor and subscribe. And while you're there, give me a thumbs up. It makes you too happy and it certainly warms my heart. All right, until I get a chance to see you on the road to your financial freedom or while I'm out there speaking, as I always say, always, always strive to live a life that holds you. See you in the next one.

25:50Thank you for listening to the Affluent Entrepreneurship. With me, your host, Mel Averham. If you want to achieve financial liberation, to create an affluent lifestyle, join me in the Affluent Entrepreneur Facebook group now at my goingambellatram.com or slash group. And I'll see you there. And that's it for this episode of Building Your Money Machine where we help you learn how to master your money, eliminate financial stress and live a life choice. If you found this valuable or helpful to you, here's what I'd love for you to do. If you do me a favor, go to Apple Podcasts or wherever you're listening to this podcast and rate and review the show. It helps us tremendously to keep us at the top of the list so we can continue to get this information and this message out to people because I truly believe that financial freedom's your birthright. And I want to help each and everyone in the planet. Thanks so much.