Unless you’re in the small percentile of people who are have received a large inheritance or trust fund or won the lottery, you need to build your wealth from scratch. And, that’s not the easiest of goals.
Between stagnating wages, mounting student debt, systematic inequality, a considerable increase in the cost of living, and a lack of financial literacy this seems futile. You can, however, increase your chances of driving your financial growth across the finish line if you adopt the following ten habits.
1. Establish life goals.
“What is financial freedom to you?,” asks Matt Danielson over at Investopedia. “A general desire for it is too vague a goal, so get specific.” Jot down “how much you should have in your bank account, what the lifestyle entails, and at what age this should be achieved,” he suggests. “The more specific your goals, the higher the likelihood of achieving them.”
“Next, count backward to your current age and establish financial mileposts at regular intervals,” adds Danielson. “Write it all down neatly and put the goal sheet at the very beginning of your financial binder.”
It should also be noted that when it comes to life goals, you’ll want to make them more manageable by setting short-term, midterm, and long-term goals. When you don’t have such goals, you’re more likely to overspend. As a result, you will be unable to pay unexpected expenses, let alone achieve life goals like retire comfortably.
Even worse? You may end up trapped in a vicious cycle of debt, feeling like you don’t have enough money to get properly insured. And, this can leave you more vulnerable than you need to be when dealing with some of life’s biggest challenges.
But, what exactly is the difference between these financial goals?
Short-term financial goals.
Setting short-term goals can boost your confidence and give you the foundation you need to achieve longer-term goals. They’re also relatively easy steps to take. Examples include establishing a budget or building an emergency fund.
Midterm financial goals.
In addition to creating a budget, creating an emergency fund, and paying down your credit card debt, you should also set midterm financial goals. You will use these goals as the connecting point between your short and long-term financial goals. Some suggestions would be eliminating student loan debt, buying your first home, or purchasing a life insurance policy.
Long-term financial goals.
Most people wish to save enough money to retire at some point in their lives. To make sure you’re saving enough, you need to figure out how much you’ll actually need to retire. To do so, you need a tax-advantaged retirement account, like a 401(k), 403(b), or traditional IRA or Roth IRA.
And, one more piece of advice. Make sure that you set your own goals.
“Pursuing your own dreams and goals creates the greatest long-term happiness and results in the greatest accumulation of wealth,” says Thomas C. Corley, who spent five years researching the daily habits of 177 self-made millionaires.
People tend to chase someone else’s dream, such as their parents, instead of defining and chasing their own goals. “Passion makes work fun,” adds Corley. “Passion gives you the energy, persistence, and focus needed to overcome failures, mistakes, and rejection.”
2. Live within your means.
Living below your means doesn’t mean being a “cheapskate” or missing out on life experiences. Rather, it “simply means that you’re spending less or equal than you’re making each month,” explains Deanna Ritchie in a previous Due article. “As a result, you aren’t putting yourself into debt by living off of plastic. And more importantly, this will help you create a more stable financial future.”
“Of course, living within your means requires discipline and a little sacrifice,” adds Denna. “However, if you stick with it, you’ll reap the following rewards, in addition to avoiding debt:”
- Less stress and anxiety.
- It makes you more successful and healthier.
- You won’t obsess over your credit score.
- The ability to build wealth.
- You’ll have more freedom.
- You’ll have financial security.
That’s all well and good. But, how can you truly live within your means without depriving yourself? Well, here are a couple of suggestions;
- Create a budget using the 50/30/20 rule. This is where you spend 50% of your take-home income on essentials like food and housing, 30% towards wants, and 20% into your savings account.
- Save your money before you spend it by automating your savings. In other words, pay yourself first where a percentage of your paycheck goes directly to a savings or retirement account.
- Eliminate frivolous spending, such as that gym membership that you never use.
- Stop keeping up the Joneses. They may be putting up the facade that they’re financially well-off. But, in reality, they could be in serious debt.
- Delay gratification. One example would be waiting for a sale or discount instead of paying full price for groceries, clothing, electronics, or travel.
- Utilize tax deductions. As a result of a tax deduction, less income is subject to federal and state taxation. There is often a tax saving to be had in everything from investing in retirement plans to home mortgage interest, charitable contributions, and college funding.
- Change the nature of your debt. Make paying back debt more convenient for you. Examples could be negotiating a better interest rate with lenders or through debt consolidation.
Also, Jeff Rose, CFP® and founder of Good Financial Cents, suggests learning to say “no” to yourself.
“This is important when you are shopping, or just out and about,” he explains. In this case, it is about avoiding impulse purchases. If you’re out somewhere and see an item you like, you buy it because it isn’t too expensive.
“Even worse is the ability to purchase things online nowadays and have it delivered to your doorstep in just a few days,” he adds. “If you do that several times a week, the spending can really add up.”
“One trick is to enforce a ‘72 Hour Rule’ on any purchases, especially online items,” he advises. “If you really think you need to buy <fill in the blank>, after you add it to your cart make yourself wait 72 hours before you purchase it.” After three days, you should be able to discern whether you actually need the item or if you just want it (and don’t need it at all).
3. Build a solid cash reserve.
While not on the top of most of our minds, having an emergency can pay dividends.
Consider the following scenario. Your work vehicle doesn’t start on you go to leave bright and early in the morning. Turns out that you need a starter. Between the replacement and labor, that’s going to set you back $400.
Obviously, this should be considered a financial emergency. After all, you need this vehicle to bring home the bacon. The problem? You don’t have the cash on hand to handle this expense.
What other options do you have other than footing the bill on your credit card? In such a pinch, you probably have no other choice. However, let’s say that the interest rate on your credit card is 18% and you make the $15 minimum payment. Not only will this take you 35 months to pay off this purchase, but you’re also going to incur around $114 in interest as well.
Having a cash reserve for these types of emergencies gives you peace of mind. And, more importantly, it helps prevent you from getting buried under debt.
In a perfect world, you should have three to six months’ worth of your living expenses stashed away. But, having any amount set aside is better than nothing. For instance, if you have $300 in a rainy-day fund, you only have to put $100 on your card.
To make building an emergency fund easier set smaller goals. For example, instead of aiming for three to six months’ worth of your living expenses shoot for two weeks or a month. Next, commit to making small, but regular contributions, such as $5 a week, until you’ve reached your initial goal.
As long as you don’t touch your emergency fund, you can set larger goals and keep contributing to it.
4. Use debt strategically.
A lot of financial experts will advise you to avoid debt at all costs. But, not all debt is bad. For example, if you plan on buying a car or home you’ll need good credit. So, applying for a credit card and using it responsibly will actually help you achieve this goal.
You can also use debt to your advantage in several other ways. Furthering your education, acquiring property, or starting and/or growing your business are all examples of using debt strategically.
What’s an example of not using debt wisely? Well, maxing out your credit card, when you can’t pay off the balance, on VIP tickets to a music festival. I’m sure that you’ll have a blast. But, if you want to grow financially, you can’t continue paying interest on credit cards.
Remember, only charge what you know you can pay off each month. And, as a general rule of thumb, avoid store credit cards. They are notorious for having low credit limits, high-interest rates, and limited usability.
5. Have an organized investment plan.
After you’ve built an emergency fund to handle the unexpected, it’s time to get your investing game on.
“There are many, many different investment account options out there,” notes Alicia Dion in a previous Due article. “However, all of the different accounts you see can really boil down into two categories;” retirement and non-retirement.
“One big mistake beginners make with investing is thinking they are too young to worry about saving for retirement,” adds Alicia. “But investing and retirement planning actually go hand-in-hand! Investing is a tool to build wealth. Retirement is an inevitable phase of life that requires wealth.”
If you want to get “the most out of your investing experience, you should start saving for both short and long-term goals,” she advises. “While retirement is a crucial thing to be saving for, it’s not normally your only financial goal. There are inevitable expenses in the short to medium term that investing can also help fund.”
“Understanding the type of account that will best fit your goals is key,” says Alicia. “Then, knowing that life will throw you all types of expenses, put your investments to work to help fund them.”
Retirement accounts come in all shapes and sizes. Some of the most common types of retirement accounts include 401(k) and IRAs. Often, these are plans that your employer will match. But, there are retirement plans tailored for entrepreneurs and small business owners.
After matching these retirement plans, you should also consider contributing to an annuity. This can supplement your other retirement accounts while also providing a guaranteed lifetime income.
As for non-retirement accounts, consider investing in stocks, bonds, or exchange-traded funds (ETFs). To get your feet wet, you can also use robo-advisors who will do the legwork for you. If you’re married, you should look into a joint brokerage account. And, if you have kids, explore options like 529 plans and UGMA/UTMA accounts,
The most important takeaway is that you have a diversified investment portfolio to mitigate risk, while also maximizing your investments.
6. Get more bang for your buck.
Your mileage may vary on this. But, this is nothing more than buying for value. For example, you need a fresh pair of flip-flops for the summer or upcoming beach vacation. Instead of dishing out the $60 for a decent pair, you buy a cheap pair from the dollar store.
I’m not disrespecting dollar stores here. The point is that those flip-flops might make it through the summer. In turn, you’ll have to keep replacing them every time you need a new pair. Eventually, the cost of replacing shoddy footwear is probably more than if you had just coughed up the $60 from the onset.
At the same time, you don’t need to shelve out $200 for a pair of flips flops. That just sounds excessive. And, you may be sacrificing quality for an expensive brand name.
Remember, frugality isn’t the same as cheapness, as any individual who is wealthy knows. As T. Boone Pickens once said, “I don’t go cheap on anything, but I’m not a shopper. If I want something, I look at it, decide what it is, but it will usually be the best product. I’ve got a pair of loafers that I still wear that I got in 1957.”
Becoming too budget-conscious can lead to unexpected expenses when it comes to furniture, clothing, shoes, or appliances. Skimping on quality means that these products will either wear out quickly or will not perform well. Because of this, you are forced to replace them all the time, which isn’t going to help propel your financial growth.
Simply put, don’t cut corners. It is always better to invest in quality over quantity.
7. Leverage your employer benefits.
You can skip this if you’re self-employed. If not, make sure that you go over your employer’s benefits plan with a fine comb. Not only may you be missing out on free money, but your employer may also offer benefits that go beyond retirement plans.
Here’s what you should be looking for;
- Retirement match. Contribute enough to match your employer’s contribution, if you can afford to do so. If you weren’t aware, this is essentially free money to you.
- Life or disability insurance. By purchasing these policies through your employer, you can save significant money.
- Health Savings Account (HSA). Your employer may match your contributions up to a certain amount if you qualify for an HSA. Also, contributions to an HSA are tax-deferred.
- Employee Stock Purchase Plans (ESPP). A company that offers ESPPs typically allows you to contribute up to a certain percentage of your pay to the plan, which then allows you to purchase company stock at a discounted rate. In short, this could be a cost-effective way to invest.
- Legal services. By using the legal services included in your benefits plan, you can potentially save money on lawyer fees if you ever need to prepare estate planning documents, such as wills and trust
8. Expand your (financial) knowledge.
It can be intimidating and overwhelming when entering the realm of finance. But, if you want to become more financially stable and master money, then you need to continuously educate yourself. Obviously, this doesn’t mean that you need to become an expert. But, you should at least become familiar with topics ranging from tax deductions to investing to retirement planning.
How you go about this is totally up to you. But, here are some guaranteed ways to improve your financial literacy;
- Read magazines, journals, and online features on financial topics. The best way to gain a better understanding of your finances is by reading both print and online financial publications. Moreover, they can provide long-term insight into your financial goals as well as current financial trends that can be used in your financial planning.
- Learn about money management by reading a book. Books can offer you more in-depth information about your finances as well as the step-by-step assistance you might need to adjust how you perceive and deal with your money.
- Listen to podcasts about finance and money. Getting more informed about your money via a podcast is a great option when you don’t have time to read. Plus, you can do this when cooking, exercising, or traveling.
- Download financial management tools. Financial management may seem like a daunting task, especially if you’re a newbie. With today’s technology, there are many money tools at your fingertips to help you become familiar with your finances and simplify your finances.
- Take a financial literacy course. Consider getting some financial instruction in a structured environment where you are able to ask questions and learn from a teacher. There are online schools, college courses, and adult education centers available for this.
- Plan your finances with the help of a professional. In a financial plan, you set priorities to accomplish your long-term goals 10 to 30 years down the road, as opposed to a budget. Think about enlisting the help of a financial professional who can help you with planning, saving, retirement, and debt repayment.
9. Seek out other income streams.
Having several different income streams can be extremely beneficial. For starters, if you lost one source of income you can fall back on the others. Another perk is that you can use the additional cash flow to pay off your debt or put it towards your savings.
In fact, this is another key habit of self-made millionaires.
“Self-made millionaires do not rely on one singular source of income,” Corley noted. “They develop multiple streams.”
He added, “three seemed to be the magic number in my study,” stating that 65% “had at least three streams of income that they created prior to making their first million dollars.”
A side hustle is what immediately springs to my mind. This would be when you freelance or pick up a second job when you have the availability. That might work temporarily, like if you want to earn some quick cash for a vacation. But, this can get exhausting — especially when juggling a full-time job and family life.
The answer? Pursuing a passive income. You’ll still have to put some work in upfront, but eventually, you will earn money without putting in too much effort. Some ideas would be renting out a spare bedroom, selling an information product, annuities, or launching an eCommerce site.
Overall, having a variety of income streams is an effective way of protecting your income, even if you love your job. You should include it in your list of good financial goals for that reason alone.
But, further reasons include;
- You may be able to semi-retire early by collecting part-time income.
- Starting a side business could be the solution if you want to start your own business without quitting your job.
- Your retirement savings could be boosted by any additional income stream.
- You could also use it to pay off your debts more quickly, saving you money from paying interest.
10. Make your health a priority.
“Finances and health are nearly impossible to separate,” writes Kate Underwood in another Due post. “After all, health care costs money, and making money is a lot simpler when you’re healthy. You may be thinking you just don’t have time to focus on healthy habits like a balanced diet, exercise, or sleep.” However, “you might change your mind if you consider the many financial reasons to prioritize your health.”
To begin with, when you’re healthy, you’re less likely to get sick and miss work. I know that’s a big deal when you’re a freelancer. If you skip a day of work, you’re not making any money. If you’re employed by someone else, missing too many days of work could prevent you from landing a raise or promotion.
Secondly, there are long-term ramifications. With the rising cost of healthcare, taking care of yourself today can reduce these expenses tomorrow. Therefore, getting enough sleep, following a nutritious diet, and regular exercising should become a part of your daily routine.
But, don’t just take my word on this. These are also traits of self-made millionaires.
“Seventy-six percent of the rich aerobically exercise 30 minutes or more every day,” Corley said. Any cardio-focused exercise, like running, jogging, or walking, counts as aerobic exercise. “Cardio is not only good for the body, but it’s good for the brain,” he added. “It grows the neurons (brain cells) in the brain.”
“Sleep is critical to success,” Corley also wrote. According to his study, 89% of self-made millionaires slept seven or more hours each night.
Frequently Asked Questions About Personal Finance
1. How do I make a budget?
Firstly, make sure you track all of your income and expenditures over the next few months. Once you know your budget in full, you can make the necessary changes. With this information, you can find out what costs you can cut, where you can save a little extra money, and how you can pay down any debt you may be carrying.
It’s important to revisit your budget once or twice a year. This is especially true if your income or expenses have changed significantly since the last time you checked your budget.
2. Does your emergency fund meet your needs?
You should always have an emergency fund available in case something unexpected happens. To make it through until things are back on track, you can use your emergency fund if you lose your job or have to cover a large bill like a medical emergency.
Is there a minimum amount you should save for an emergency fund? It’s recommended that you have enough in an emergency fund to cover your expenses for at least three to six months, while others say you should be able to cover expenses for up to twelve months. But, this can vary depending on factors like;
- Your lifestyle
- Your area’s cost of living
- A job that provides long-term security and income
- Job opportunities in your field
- Access to affordable health insurance
Generally, after paying necessary expenses, it’s up to you to save what you can. Any amount, no matter how small, can help when something unexpected occurs.
3. Should I pay off debt or save for retirement?
You need to consider your financial situation to answer this question. An overview of your budget may provide some guidance. It’s a good idea to start building retirement savings with a 401(k) plan through your employer if you have the option.
After that, review your budget and find how you can cut costs to lower your debt. It is possible to create a plan to pay off debt and save for retirement with the help of a financial professional.
4. How much should I save each month for retirement?
The following question could be another area where a financial professional could help you. In general, you need to consider your current budget, when you plan to retire, as well as your retirement goals when deciding where and how much to put your savings.
Moreover, take into consideration the retirement expenses you’ll need to make, as well as long-term care and health insurance costs.
5. Are you ever done saving?
The short answer is no.
You should aim to have enough savings to cover the essentials, as well as periodic but not unexpected expenses. These include routine house and vehicle maintenance, vacations, and special gifts.
As well as having regular savings, you should have enough to handle acute emergencies, like paying off credit card debt or replacing your vehicle’s tires. Since you know they will happen at some point, these aren’t true emergencies. But planning for them is still prudent since you don’t always know when they will happen.
Image Credit: Alexandr Podvalny; Pexels; Thank you!