Regardless of your earnings, there are universal truths when it comes to wealth accumulation. Whether you inherit money, win the lottery, are a high-income earner, or just getting by, the little things are what make a difference in growing and maintaining wealth. Below are the best money habits to grow wealth.
It does not matter how much money you make, only how much you keep.
Pay Yourself First
If you want to grow your wealth, you need to have the right mindset. This means understanding that a portion of everything you earn is yours to keep.
What does this mean?
When you go to work and earn an income, after taxes and insurance/benefits how much is left? At first, you may think this is the amount of your earnings that you get to keep. However, a chunk of this money pays for housing, utilities, food, clothes, vacation, car, childcare, and numerous other miscellaneous expenses that pop up. This is not money you are keeping for yourself. Rather, you are spending money earned today on expenses purchased today.
A portion of everything you earn is yours to keep.
If you spend everything you earn today on expenses purchased today, you will never build wealth. The only way to build wealth is to set aside money each pay period for the purpose of investing. Investing allows your money to work for you, rather than you working for your money. Instead of trading time for dollars, investing allows your dollars to do the heavy lifting and you can live your best life. The more you invest, the more dollars you have working for you.
Paying yourself first means setting aside money for retirement, putting money in an emergency fund, and saving in taxable investments within a brokerage account, real estate, or other opportunity.
Before you invest, do your research
Don’t invest in something you don’t understand and don’t give your hard earned money to people just because they say they can help. No one cares more about your money than you.
Some financial advisors are great – others make investing overly complicated for the sole purpose of increasing fees. Fees will eat away at your wealth quickly.
For this reason, you need to know at least the basic principals of what you want to invest in. Researching does not need to be boring. Learning how to make money can be fun and interesting. Check out my article on Investing for Beginners for the basic principals and terminology to get started.
If you are interested in learning about the fundamentals of investing in the stock market, I highly recommend the book A Simple Path to Wealth by JL Collins.
If you are interested in real estate investing, I highly recommend checking out BiggerPockets.
Live Below Your Means
No one ever got ahead by spending all their money. Living below your means is another one of the best money habits to grow wealth.
If you want to reach your financial goals, you need to cut back on something. Just because you can buy something doesn’t mean you should.
Time = Money
Stop thinking of your purchases as a monetary transaction and start thinking of them in terms of a time transaction.
For example, should you buy the new $1,000 phone or should you invest the $1,000? How much time do you need to tack onto your working career in exchange for the new phone?
If your estimated annual retirement spending is $50,000 per year and you invested the $1,000 today and retired in 30 years, assuming a 7% rate of return each year, then you would have just over $7,600. This is approximately 15% of your annual spending in retirement which represents just under 2 months.
I’ve simplified the calculation and made some assumptions here but the concept stands. For every purchase you make today, you delay retirement and tack on more time to your working years.
Setting goals is really important. Know what you are working towards and why. Write those goals down on a post-it, put it on the fridge. Look at your goals every day, read them, say them in your head.
Human beings need to see progress to stay motivated. Regardless of what stage of life you are in, it is always best to be working towards something.
Creating SMART goals will help you develop a road map. Remember, the longer the time horizon, the more speed bumps you are going to run into. Don’t get discouraged – we all run into speed bumps. Work through the bumps – the end goal is the same.
Any money “win-falls” should be saved, never spent
This includes end of year bonuses, monetary gifts, etc. If you receive a raise, bonus, or money as a holiday gift then save it/invest it. If you always spend your bonuses or monetary gifts then you are likely to fall victim to a thing called lifestyle creep.
You can’t miss what you’ve never had.
Once you are accustomed to a certain lifestyle it is really hard to go back to your previous (less expensive) way of living. Try to avoid, as much as possible, lifestyle creep.
Saving/investing win-falls is one of the best money habits to grow wealth!
Pay-Off High Interest Debt
High interest debt such as credit card debt or payday loans is crucial. The interest rates on these loans is absolutely debilitating.
Before you pay off your high interest debt, you want to make sure you do not need to go into more debt. Step 1 is to have a $1,000 emergency fund ready to catch you if something bad happens.
Once you have $1,000 in your bank account then start aggressively paying down the debt. Cut anything and everything you can to reduce your monthly expenses so that you can get that debt out of your life.
There are two main strategies to paying down debt: 1) Snowball 2) Avalanche.
To learn more about these debt paydown strategies click here.
Save for Retirement Now
Do not wait to save for retirement. The longer you wait, the more insurmountable achieving financial independence is going to be. Saving for retirement now is one of the most important money habits to grow wealth.
My rules to retirement savings is as follows:
- Save $1,000 in an emergency fund
- Pay down high interest debt
- Build a 6 month emergency fund and, at the same time, invest in a 401(k) equal to the employer match.
- Once your emergency fund is fully funded, be as aggressive as you can with your retirement contributions.
Saving for retirement is the largest financial undertaking you will face in your life. It will take years.
If you are interested in learning more about how to save for retirement, click here.