Warren Buffett warns there's only 1 way that a 'smart person' can go broke — are you making this big financial misstep?

These statistics highlight how much the typical American family is struggling to build wealth. There are several potential reasons for this, from inflation to pay stagnation, that are beyond the control of the average income earner.

But Warren Buffett believes there are some avoidable financial mistakes that could be holding many people back. Here are three he’s mentioned over the years.

Zero-Balance Mentality

Buffett seems to enjoy living well below his means despite his massive fortune.

Unfortunately, some people operate under a zero-balance mentality. A person might believe they can get away with spending $1,000 a week if they earn $1,000 that week. In reality, they can actually only afford to spend less than $1,000 if they account for unexpected expenses and the need to save.

This may be one of the reasons why the personal savings rate in the U.S. is below pre-pandemic levels at 4.1% of disposable income as of November, according to the Federal Reserve bank of St. Louis.

Buy Now, Pay Later

Buffett has never been a fan of leverage, which is the use of borrowed funds to raise one's trading position.

"If you don't have leverage, you don't get in trouble. That's the only way a smart person can go broke, basically,” he told the U.S. government in 2010 as part of an investigation into the 2007-2008 financial crisis.

Accordingly, Buffett's Berkshire Hathaway has a debt-to-equity ratio of just 0.25. But the average American seems unable to manage the same level of risk: U.S. household debt accounted for 64.1% of GDP as of September, according to CEIC Data.