When it comes to personal finance, there are basically two types of habits: wealth-building habits, and wealth-diminishing habits. In other words, every financial decision you make will either move you closer to wealth, or further from it.
So, it stands to reason that the more wealth-building habits you adopt, the more likely you are to become wealthy. I mean, if you only ever make financial decisions that have been proven to make people rich, then you should end up rich too, right?
In theory, yes.
But here’s the thing, while it’s easy to talk about wealth-building habits, actually adopting them requires a whole lot of discipline and consistency.
Beyond that, with a seemingly endless amount of bad financial advice out there, the lines between good financial habits and bad financial habits have gotten a little blurry. And that’s exactly why I decided to write this article.
In this post, I am going to lay out 10 of the top financial habits that have been proven to help people build wealth; the wise, and honest way.
In other words, I’m not talking about the kind of wealth that requires all sorts of risk, stabbing friends in the back, or leveraging yourself to the hilt. More often than not, that just leads to financial (or relational) misery. Rather, the habits in this article are meant to build wealth, and a meaningful financial legacy over the course of your entire life.
So, if you’re in this financial game for the long haul, and that all sounds good to you, then keep reading.
1. Set Better Financial Goals
One of the things I have found throughout my personal finance journey, is that most people have a general idea of their financial goals. That said, very few people actually write them down and clearly define a timeline in which they would like to achieve said goals.
For instance, it’s normal to hear someone say, ‘I want to be a millionaire’. But, the problem with goals like this is that they lack definition and clarity.
I mean, if you want to be a millionaire, what’s your timeline for achieving that goal? Also, what kind of steps are you going to take on a consistent basis in order to achieve it?
A better goal would look something like this:
“Within the next 15 years, I am going to have a net worth over a million dollars. In order to achieve this goal, I am going to get out of debt in the next six months, and invest a minimum of $3,500 per month in mutual funds with an average annual return over the last 10 years of at least 10%.”
Seriously, between the first goal and the second, which person would you expect to actually become a millionaire? I would bet on the second person.
Plain and simple, if you want to build wealth, you need to get in the habit of setting better, clearly-defined financial goals.
2. Live On A Budget
Budgeting is one of the most important wealth-building habits you can adopt, because it is your daily and monthly plan for achieving your financial goals. It is also your guide for when it comes to making sound financial decisions.
I can personally attest to the power of budgeting, because the day my wife and I decided to get on a budget, we were in $34K of debt, with a net worth of somewhere around -$25,000. (Yeah, I don’t love telling this part of the story, but it’s the truth.) On a better note, after living on a very strict budget over the next 12 months, we got completely out of debt and increased our net worth by almost $75K.
Now, I know that isn’t what you would consider ‘wealthy’, but if you take what we were able to do over the course of a year, and extrapolate it over the course of 10, 20, or 30 years, it turns into some serious wealth. And seriously, it all boils down to sitting down with a budget every day, tracking your expenses, and checking-in and refocusing on your financial goals.
That’s why living on a budget is one wealth-building habit you need to master.
- 21 Simple Tips To Make Budgeting Easy
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3. Save Before You Spend
Of all the saving tips we have given on this blog, saving before you spend is the most prominent. This is often referred to as ‘paying yourself first’, and it is what I would refer to as a must-adopt wealth-building habit.
You see, for most people, saving money is the last item on their financial list. In other words, they save whatever money is left in their checking account after paying all their bills, covering all their expenses, and spending money on fun and recreation.
The problem with this method is that it subjects your monthly savings to the whims of your spending habits, by placing it at the bottom of your financial priority list. So, if you ever have a month where you decide to spend a little more than usual, the money just comes out of your savings. On particularly bad spending months, this might actually mean that you don’t have anything left over for savings at all. Ouch.
That’s why, if you make saving money (i.e. moving your budgeted amount of savings into your savings account) the first thing you do whenever you get paid, you are much more likely to hit your monthly savings goals.
Think about it like this, if you want to get in shape, one of the best habits you can adopt is going to the gym every morning before work. That way, no matter what arises throughout the day, it doesn’t interfere with your workout. So, if you have to work late, or you get tired, or your co-workers want to hang out after work, you can do so without missing a workout. Meanwhile, if you place your workout at the end of the day, you may end up working out, but other things are much more likely to interfere.
Think of saving money the same way. If you want to save it, then you need to make it the first action you take with every paycheck, and live off of whatever money is left over.
Also, if you really want to protect your savings, I recommend setting up a savings account at a completely different bank than your checking account. That way, if you want to spend money on something that requires you to dip into your savings, you will be forced to move money from one bank to another; which is inconvenient, and can help stop you from spending money you shouldn’t.
- What’s The Point Of A Savings Account?
- How To Save 50% Of Your Income (25 Simple Tips)
- How To Save $1,000 Fast (10 Killer Tips)
- Why You Can’t Save Money: 10 Money-Sucking Reasons
- Multiple Savings Accounts: The Secret To Budgeting?
- Multiple Savings Accounts: The Secret To Budgeting?
4. Stay Away From Debt
Debt is pretty much the opposite of wealth.
Think about it, with wealth, you earn interest on your money, and increase your net worth. Whereas, whenever you incur debt, you increase your liabilities (which decreases your net worth), and you end up paying somebody else interest instead of earning it. Even on 0% interest debt, you are restricting your monthly cash flow, which hinders your ability to invest and save money. Not good.
In other words, if you want to build wealth, you need to get in the habit of saying ‘no’ to debt. And I’m not talking about some of the time. I’m talking all the time.
That means paying off your mortgage, buying your cars outright with cash, cutting up your credit cards and only using your debit card, and never taking out a loan of any kind.
When you eliminate all your financial liabilities (i.e. money you owe to somebody else), you will only ever spend your life adding to your net worth.
- 21 Tips To Pay Off Credit Card Debt FAST
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- The Dangers Of Debt: 13 Reasons You Should Avoid It At All Costs
- How To Get Out Of Debt Fast (Even On A Low Income)
- Debt Snowball Calculator
5. Develop Passive Streams Of Income
If you are unfamiliar with passive income, it is just money you earn that doesn’t require your continued presence or work. If you’ve ever heard somebody talk about making money while you sleep, they were referring to passive income.
The most basic, and foundational, form of passive income is interest earned on investments. For example, if you invest in a mutual fund that earns interest every year, then the money you make on that investment is considered passive. However, there are more than one way to skin the passive-income-cat.
For instance, you could start a blog that generates affiliate income, info-product sales, or income from display ads. Many people have done this and found phenomenal success.
Or, you could invest in rental properties, from which you make passive income through your tenant’s rent checks every month. Though, it’s important to remember that if you want to invest in rental properties, you should pay for them outright with cash. There is no point in taking on a mortgage for a rental property (which decreases your return) when you could just invest that same amount of money in a mutual fund and earn a much higher return without near as much risk.
Nevertheless, over the course of time, you should work on building a steady stream of passive income. Whether it’s through investments, a blog, or a debt-free side business, developing passive income is a phenomenal wealth-building habit to adopt.
- Passive Income Vs. Active Income (A Beginner’s Guide)
- How Much Does It Cost To Start (And Run) A Blog?
- 7 Proven Ways To Create Multiple Streams Of Income
- 10 Tips To Make More Than Minimum Wage
- Blog On A Budget: 10 Low-Cost Essentials For New Bloggers
6. Live On Less Than You Make
No matter how much income you make, if you spend it all, you’re broke. Seriously, it’s better to make $50K per year, live debt-free and save $2,000 per month, than to make $100K per year, and spend it all on debt and other expenses.
To put this one simply, if you want to have money, then you need to live so that you get to keep the money you earn. In order to do that, you need to live below your means.
The wider you can make the gap between your income and your monthly expenses, the more wealth-building power you have.
7. Invest Consistently
No matter what anybody tries to tell you, the best method for investing is to do it consistently for a long period of time. Sure, there are people that might make a lot of money day-trading and trying to time the market, but they are extremely rare, and probably have a lot more about investing than you and me. So, just leave that to them.
Rather, if you want to build wealth, you should just start contributing to retirement accounts like a 401K or ROTH IRA. Additionally, you should invest a good portion of your income in mutual funds with a good, long-term, track record. And, if you don’t know how any of this works, you should meet with a financial advisor that does, and figure out a long term financial plan that focuses heavily on consistent investing.
When you invest consistently, you are putting the power of compound interest to work. Over time, you will probably end up making more from the interest of your investments each year, than you do from your annual salary.
Now, that’s a wealth-building habit I can get behind!
8. Focus On The Long-Term
If you haven’t picked up on this theme throughout this post, then let me make it clear, if you want to build wealth, you need to focus on the long-term. And when I say long-term, I’m talking about a minimum of 5 years, but preferably, multiple decades.
There’s a saying, “all good things take time,” and when it comes to building wealth, this statement hits the nail on the head.
You see, the more you try to game the system and cut corners on your journey to wealth, the longer it will end up taking you to get there. And honestly, every decision you make, from investing in something risky and unproven to spending money on a purchase that exceeds your monthly budget, carries long-term financial consequences.
So, whenever you are faced with a financial decision, big or small, get in the habit of asking yourself, which of these choices aligns with my long-term financial goals. If it requires you to stray from your financial plan in hopes of a short-term gain, run away.
9. Don’t Compare Yourself To Others
In my life, almost every time I have compared my financial life to someone else’s, I have ended up making a bad financial decision. If you’ve ever heard someone use the phrase,” keeping up with the jones’”, this is what they were talking about.
The thing is, if you spend your time focused on all the people with bigger houses, fancier cars, nicer clothes, and families that take better vacations than you, you are more likely to buy something you can’t actually afford. In most cases, that means taking on debt, which by this point you know, is a wealth-diminishing habit.
The worst part about comparing yourself to others, is that you can’t determine someone’s financial situation by looking at their stuff. Just because someone has a nicer car than you, doesn’t mean they have more money. In fact, they are probably making giant monthly payments on it every month and carrying a huge amount of debt.
Therefore, one of the most important wealth-building habits you can master, is focusing on your own financial situation instead of comparing yourself to others. This will lighten your financial stress, and help you find contentment on your road to wealth.
10. Learn About Personal Finance
If you don’t know much about personal finance, then it is time for you to learn.
Think about it like this, if you wanted to become a better golfer, you would probably take lessons, spend countless hours on the range and practice green, and all sorts of books and articles. Truthfully, if you want to learn any particular skill, you need to educate yourself and practice in order to get better. And I think most people understand that.
So then, why do so many people think they can just build wealth without the same kind of effort?
To put it simply, learning about personal finance is critical to your wealth-building success. So, pick up a book about personal finance, follow some personal finance blogs (ahem… starting with this one), and get to studying.
No pressure, but your future wealth depends on it.