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The path to wealth is not a quick one. It takes years of disciplined decisions to save more, spend less, invest, and stay out of debt. And the truth is, the only way to make effective financial decisions in your day-to-day life is to build financial habits. Without healthy financial habits, there are countless distractions to derail your path to wealth.
Today, we’re taking on those financial habits, so you have the tools you need to be financially successful. If you implement the tools I will share with you today, your journey is certain. You will build wealth. So, let’s get started.
What are Financial Habits?
First, let’s talk about the meaning of financial habits. Financial habits are the things you do consistently that define your longer-term financial future.
It is the decisions like bringing your lunch to work instead of going out to eat and minding a budget before making purchases that will have the most significant impact on your financial future.
There are good money habits and bad money habits. The truth is, though, while building wealth may feel difficult, there aren’t that many money habits you need to master to be successful. If you can bring the 17 financial habits into your life that I am about to share with you, you will be well on your way to financial success.
1. Begin with the End in Mind
What are your long-term financial goals? Maybe you want to retire early. Perhaps you want to quit your 9 to 5 and become an entrepreneur.
Whatever your goals, it is the daily actions you take, which will help you get there. The best way to make positive choices in your everyday life is to set financial goals to keep you motivated.
So, begin with the end in mind. Set financial goals. Then use those goals as a driving force to make the right decisions day-in and day-out.
2. Live Below Your Means
Once you have your financial goals set, it’s time to start making decisions with your money.
If you ask financial experts about the number one thing you can do with your money to build financial success, I suspect most will say the same thing. Spend less. Save more.
While this advice may feel somewhat tired, it’s because it is the area where most people go awry.
Living below your means is step one to enable you to work towards other financial habits like investing or getting out of debt.
3. Track Your Spending & Budget Your Money
On the path to learning to live below your means, there is one way, and only one, to be successful. You must track your spending. Let me say that again. You must track your spending.
Make $30,000 a year? Track your spending. Make $300,000 per year? Track your spending.
I’ve got news for you. It doesn’t matter how much you make. No matter the income, nearly every financially successful person keeps a close eye on their spending and what they can afford.
4. Build an Emergency Fund
Once you’re tracking your spending and budgeting, you’ll want to take some money you’re setting aside and put it towards an emergency fund.
Why is your emergency fund so important? Because the last thing you want once you’re making progress towards your goals is to get derailed by an unexpected expense.
An emergency fund can be held in a savings account, but I prefer to put it somewhere a little less accessible – like Series I savings bonds.
Over time, aim to build up six months of savings to cover unexpected medical bills or job loss.
5. Lower Your Bills
As you start tracking your spending, you will likely notice some areas where you’re spending more than you realize. And, if you’re anything like me, you’ll start wondering if there’s any way to cut your bills.
I want to talk about two different strategies to lower your bills.
1) Focus on your Biggest Costs
While everyone likes to talk about drinking fewer lattes and eating less avocado toast, the reality is that cutting down on Starbucks isn’t going to make you wealthy (though, of course, small habits add up to big money over time).
The truth is, if you want to accelerate your path to wealth, you need to figure out how to make significant changes in your finances. What are the highest costs for most people? Housing and transportation.
If you live in an apartment, could you move into a place that is 10% cheaper? Could you trade in your fancy car for a used car and save $100 per month on your car payment?
These types of changes can have the most significant impact on your finances, and that’s why it makes sense to start here.
2) Lower Everyday Bills
While making substantive financial changes can take a bit of time, there are some changes you can make to reduce your spending on everyday bills very quickly.
It is possible to save money on bills like cable, internet, cell service, and more. If you’re not regularly calling these providers about your bill, chances are, you’re paying too much.
Why pay more than you have to?
6. Pay Yourself First
Finally, before moving onto the financial habits related to investing, remember the age-old adage to pay yourself first. Instead of paying your bills and then keeping what’s leftover, do the opposite.
Pay yourself 20% of your income and then figure out how to adapt your lifestyle to live with what is left.
While this won’t be an overnight transformation, this is what it means to live within your means. Save what you need to, then find ways to live with the remaining amount.
7. Invest More
If you’ve been able to adapt your spending and saving habits successfully, you’re well on your way to building the right financial habits.
However, there’s more to be done, particularly when it comes to investing.
In the words of Robert Kiyosaki in the book Rich Dad Poor Dad, savers are losers. Now to be clear, that doesn’t mean you shouldn’t save money. It just means that the money you’re saving needs to go into an investment that creates more money. Because otherwise, your wealth will erode over time.
If you’re unsure where to start, check out this After School Finance guide on How to Start Investing.
Over time, make it a habit to boost your contributions as you earn more money. For example, if you get a 3% raise, raise your investment contribution by 1%. While it feels like a small change, it can add up.
Say you make $60,000 per year. An extra 1% is just $600 per year. But do that for 30 years at a 7% return, and you’ll have an extra $56,000.
Small changes add up.
8. Plan for Retirement
As you’re thinking about how much to invest, consider your financial goals. While you likely have many different purposes for which you are investing, the biggest goal on most people’s minds is retirement.
If you can, aim to put 20% of your income towards investing for retirement. I realize this is a lofty goal. But if you work towards it over time, small increases in contributions will add up to a better (and earlier) retirement.
9. Cut the Investment Fees
If there’s one thing I hate, it’s investment fees. Investment fees are the enemy of wealth-building.
And unfortunately, fees are everywhere. Do you own mutual funds? There are fees. Do you have a financial advisor to manage your investments? Say hello to fees.
While you can’t avoid fees entirely, you can work to minimize them. The best index funds (which is how most people should invest) have very minimal fees. And there’s no need to pay someone to manage your investments for you.
The best way to see what fees are costing you is to analyze your portfolio. I use Personal Capital to track my portfolio, as it gives me a forecast of how much investment fees are costing me.
10. Build Streams of Passive Income
While investing money from your regular income is a great place to start, another trick to begin accelerating your wealth-building is to build streams of passive income.
Passive income streams could come from investing in real estate, alternative investments, or much more.
Real estate is the passive income stream I am actively pursuing, both through investments in a platform called Fundrise, which allows you to invest in real estate with as little as $500, and through purchasing rental property in the Midwest.
Fundrise is my favorite tool for getting started with real estate investing. It allows you to invest in a diversified portfolio of commercial real estate at low costs and with a great deal of transparency. Check out my full review to see if this tool is right for you!
Check out this list of 7 Passive Income Ideas for more inspiration.
11. Start a Side Hustle
While in a perfect world, we’d all have passive income streams, sometimes it takes some work to build streams of income.
If you’re looking to boost your income by putting in some extra legwork, you’ll want to think about starting a side hustle.
This could be starting a blog or business, driving for a rideshare service, or much more.
Are you looking for ideas? Check out this list of 99 side hustles to find something that fits your interests.
12. Cut Out Bad Debt – For Good
Now that you’ve got some ideas for investing and boosting your income, you’ll want to put some habits in place to tackle debt.
Despite what many purported experts say, I believe that there is good debt and bad debt. Good debt can help you build more wealth, while bad debt takes wealth away. Want to learn more about debt? Check out the different types of debt and learn which ones can benefit your finances and which will do nothing but take wealth away.
There is no reason to have bad debt like credit cards. If you have credit card debt, make it a top financial priority to eliminate it.
Get this type of debt paid off, and going forward, avoid bad debt by paying your credit cards in full every month.
13. Check Your Credit Report
As you’re working on getting your debt situation under control, checking your credit report is one of the easiest things you can do.
You can do this on annualcreditreport.com once per year for free. I would then recommend you use some kind of credit monitoring service like Credit Karma (which is also free). It will allow you to keep an eye out for unexpected changes and have a good handle on your credit score.
Finally, look for ways to boost your credit score. It can help you have the maximum opportunities available to use debt to create more wealth, such as through investing in real estate.
14. Don’t Buy Whole Life Insurance
This next tip is about insurance. While insurance is a personal finance topic in itself, the area where I see most people make mistakes is when it comes to life insurance.
When it comes to life insurance, you do not need life insurance unless there is someone who relies on your income. Typically, you may need life insurance if you have a spouse or children.
If you do need life insurance, buy term insurance. Term insurance is insurance that will cover you up until a certain age.
Alternatively, there’s a type of insurance called whole-life insurance. This type of insurance covers you for your entire life.
Here is why I recommend you steer away from whole-life insurance.
1) It’s costly.
2) It is sold as an investment product, and it isn’t a good one.
Term life insurance is the least expensive option, and you can invest the money you save by not buying a whole-life policy. By doing this, you’ll avoid the fee-riddled insurance provider option and be in control of your investments instead of letting an insurance company have the power.
15. Avoid Lifestyle Inflation
If you’ve made it through the first 14 tips, these final three financial habits are a “bonus” to help you make even more progress.
Recently, I was listening to a podcast, and the interviewee asked an interesting question. What would you do if you were given a million dollars?
Is your answer that you’d buy a bigger house? Or a boat? Or a new car?
If you were to ask any millionaire what they’d do with that money, they’d tell you the exact opposite.
They’d invest that million dollars to make more money. When it comes to the financial habits of millionaires, they do things differently. They don’t view money as for spending. They view money as a means to increase their financial security further and build more wealth.
16. Automate your Finances
This second to last tip can help you stay on track.
It is not easy to maintain daily financial habits with the end in mind. So, the best thing you can do is set up systems to help you stay on track rather than relying on willpower alone.
Learn how to automate your finances, so you save, invest, and avoid debt automatically. This will make it more challenging to overspend and much easier to put money away towards your goals.
When you read about the financial habits of the wealthy, one habit that always comes up is that they read. Continuing to learn can help you make more educated financial decisions and learn even more habits to benefit your finances.
Are you looking for some books to get started? Check out my favorite personal finance books!
What Are Some Bad Financial Habits?
The 17 financial habits we’ve covered are the only steps you need to reach financial freedom, and if you do them well, you will be successful.
However, many ask for examples of bad financial habits. Why? Because it may help you realize if some of these habits have found a way into your life.
While there are countless examples of bad financial habits, some of the most prevalent are:
- Spending more than you earn
- Using credit cards to pay for bills
- Having no savings
- Not planning for your financial future
17 Financial Habits: A Summary
Hopefully, these examples of financial habits have helped you learn about the types of things you should be doing with your finances.
Consistent daily action will lead to massive results.
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