7 wealth building habits you need to start now
Your wealth can typically be managed 1 of 2 ways: Either you are building your wealth, or you are shrinking your wealth. Each and every day, we are faced with multiple decisions that ultimately have an impact on our financial lives – and it's up to us to make the best decision for our future financial success.
The good news?
Many wealthy and successful individuals have shared their wealth building strategies, and it appears that building wealth often comes down to your daily habits.
While practicing the right habits can substantially help increase your wealth, it's important to realize that it takes time for a habit to form and become second nature. In fact, studies indicate that it can take an individual anywhere from 18 to 254 days to form a new habit, and it can take an average of 66 days for that new habit to become an automatic behavior.
If you're ready to change the trajectory of your financial future, here are seven wealth building habits you may want to consider:
1. Create a Budget
Think about the last time you took a long road trip.
Chances are, you probably needed a GPS or some sort of map to help you get from Point A to Point B in a reasonable amount of time. That's exactly the function of a budget.
Budgeting is one of the most important -- maybe the most important -- wealth building habits you can start implementing in your life today. Not only does budgeting help you better understand your current financial position, it also helps you gain a better view of your expenses and income.
In fact, a budget gives you the chance to understand where you are spending your money and can help you identify areas where you can potentially cut out unnecessary living costs.
Typically speaking, you'll want to review your budget and track your expenses weekly (at a minimum).
2. Pay Yourself First
Paying yourself first does not mean going to the mall or to the car dealership the second you receive your paycheck to spend it on yourself. It means quite the contrary.
Paying yourself first, in fact, refers to building wealth for your future self.
Here's an example: When you receive your paycheck, before you pay your bills, make new purchases for the month, etc. – first deposit a small amount of your paycheck into your investment account (for example). Once you've done that, you can use the remaining money for your daily living expenses.
Why is paying yourself first so important? You take care of yourself first.
Instead of spending your paycheck first and investing whatever amount is leftover at the end of the month (which typically is not much), you flip the script. You spend the money that's leftover after investing it into your future self.
While most rules of thumb suggest for you to save about 10% of your gross annual salary each year, if you're really looking to make a dent in your financial future, you may want to increase your savings rate to at minimum 30% of your gross annual income per year.
3. Start a Side Hustle
Budgeting and slashing expenses is a great way to save more money. However, these money saving strategies have their limits because you do, after all, have to spend some amount of money for your basic living expenses (such as rent, food, electricity, etc.).
While cutting costs is limited, earning more money is unlimited. And that's where the side hustle comes into the picture.
A side hustle is essentially extra money making activity that you engage in, that's not your full-time job. Side hustles can earn anywhere from $10 a month to thousands per month – at which point, some can actually turn into your full-time job.
The point is that if you're strapped for cash and you truly believe you've done everything in your power to cut costs, your next step might very well be to take on a side hustle and start increasing your income. Any extra income you earn could be used to help pay for basic living expenses or help improve your future financial trajectory by investing the extra money you make.
4. Invest for the Long Term
When it comes to money, time is your greatest advantage.
That's because of compound interest, which is when your money starts earning you more money – without you having to move a single finger.
Compound interest typically doesn't happen from one day to the next – it often takes years to see a substantial difference in your net worth.
So how do you take advantage of compound interest? It all starts with investing.
The great news is that you don't have to hold an MBA, have graduated from an Ivy League university, or have spent years trading on Wall Street to become a successful investor.
In fact, some of the most successful investors (I'm thinking of Warren Buffett, for example) often elect to invest their money in what is known as passive index funds.
Passive index funds basically mirror the stock market, so there is little chance that you'll ever outperform the stock market – but from a historical perspective, the stock market has always gained value over the past few decades.
Keep in mind that as your income grows, the amount of money you contribute to your investments should also increase.
Assuming you've stayed invested and have consistently added to your investments, in 3 to 4 decades, compound interest could make a very substantial difference to your net worth.
5. Pay off High-Interest Debt
While sometimes a credit card is necessary and can help you establish and build your credit for future big-ticket purchases (like cars, houses, etc.), maintaining a credit card balance will certainly not help you build your wealth.
In fact, a credit card balance is like poison to growing your net worth.
That's because many credit card carriers charge a very high-interest rate (typically north of 20%) on any unpaid credit card balance that you carry.
Think about it this way: If you invest in the stock market, the average annual return lies between 7% to 10%. On the other hand, if you keep your credit card balance, you could be paying north of 20%!
Financially speaking, what makes more sense in this case? Paying off your credit card debt as fast as possible.
There are typically two main strategies to paying off your credit card debt, which are known as the Snowball Method and the Avalanche Method.
The main difference between these two debt pay-off strategies really has to do with the order of how you pay off your debt:
- Snowball Method – Pay off the smallest balance first (while making minimum payments toward your other debt). Once your smallest balance is paid off, roll your payments to the next highest balance (and so on).
- Avalanche Method – Pay off the balance with the highest interest rate first (while making minimum payments toward your other debt). Once your highest interest rate balance is paid off, roll your payments to the next highest interest rate (and so on).
From a financial standpoint, the avalanche method saves you more money. However, from a psychology standpoint, more people have found success with the snowball method.
The best approach to start paying off your debt is simply by creating a list and organizing the type of debts you have (credit card, mortgage, car, etc.), the balance you owe, and the interest rate associated with each balance.
From there, you can create a timeline and a solid game plan to tackle your outstanding debt and start chipping away at your outstanding balances bit by bit.
6. Build an Emergency Fund
While it's cliché, it's true that the only constant in life is change.
And that's where we have to protect ourselves – financially speaking – from the unexpected curveballs that life loves throwing our way. Some of those curveballs could include flat tires, a leaky roof, a vet visit, etc.
The point is that if you don't have a suitable emergency savings fund, you may have to use your credit card debt to take on these unexpected expenses. That's where an emergency fund comes into play.
An emergency fund is a cash account that you can easily access at any point in time and withdraw your money for emergencies only.
Typically, experts recommend having about 3 to 6 months' worth of your living expenses in an emergency fund.
Here's another trick to earn more money with your emergency fund: Instead of keeping your cash at a regular brick-and-mortar bank savings account, consider opening an online high-yield savings account.
For example, a standard bank savings account typically earns you around 0.01% in interest on your money. An online high-yield savings account, on the other hand, can typically earn you more than 0.50%, depending on the current economic conditions.
7. Refine Your Financial Goals
While you might have a good idea of how you want your financial future to look, have you actually taken the time to refine your financial goals?
Most people have a vague idea of what they want to accomplish, financially speaking, but they haven't taken the time to truly crystalize their thoughts and plan out the steps they need to take to make their financial goals come to fruition.
Psychologically speaking, humans tend to accomplish tasks (or goals, in this case) with a higher success rate if these goals are distinct and well outlined.
So, instead of saying, "I want to become a millionaire," you could improve your chances of accomplishing this goal by saying something like, "I will have a liquid net worth of $1 million in 20 years."
To accomplish this goal, I will pay off my credit card debt within the next 12 months, continue investing $3,000 per month in low-cost index funds, live on $3,000 per month, and keep my emergency savings account fully funded."
Keep in mind to give yourself time and room for failure as you implement these wealth-building habits into your everyday life. You probably won't start seeing a significant change in your financial picture in the short term.
However, as long as you stay focused on your wealth building goals – whether that's becoming a millionaire or paying off your debt – you will likely start seeing a difference soon.